Across all regions, the volume of capital flowing into real estate fell back in Q1 2016. Investors interpreted the market volatility as indicating either an imminent financial crisis in China, or the end of the U.S. economic cycle—or both—and decided to be cautious.
Although the current cycle is entering its mature phase in the U.S., our analysis suggests there are some years to run, so real estate investors and developers can continue to deploy capital, at the same time as beginning to plan and prepare for the next downturn.
However, a cyclical approach is the key to successful real estate strategy from any perspective. As we show in this ViewPoint, following the U.S. unemployment rate is a good way of keeping track of overall economic and real estate conditions. When unemployment is falling, jobs are being created and incomes are rising—and demand for space increases and rents rise. When unemployment is rising, companies are cutting back and rents are declining.
Real estate cycles in modern, information-rich economies like the U.S. are created by movements in demand, not supply. The unemployment rate, though it lags economic growth by a few quarters, is the single best indicator of the state of demand in the U.S. economy. It is currently approaching its cyclical low point, which indicates that a turning point in the U.S. (and global) real estate cycle is on the horizon.