Property Cycle

The property cycle describes how real estate markets move through recovery, expansion, oversupply and recession, then repeat. Rents, vacancy, construction and cap rates all move through it. Cap rates tend to fall during expansions, as investors compete for property, and rise during downturns.

NOI and cap rates often move together in a way that amplifies price swings. In an expansion, rents rise and cap rates fall, so values rise on both counts. In a downturn, rents soften and cap rates rise, and values fall on both.

For a buyer, the cycle is a reason to underwrite with an exit cap rate at or above today's. A property bought at a cycle low cap rate needs rent growth just to hold its value when cap rates return to normal. See terminal value for how that assumption enters a projection.