Real Estate Cycles & Macroeconomics: Understanding Market Trends in Syndication

Real estate cycles and macroeconomic trends play a crucial role in the success of real estate syndications. Understanding these patterns can help syndicators and investors make informed decisions about market timing, capital raising, and deal structuring. To get started with your syndication or fund visit https://www.moschettilaw.com

Real estate cycles and macroeconomic trends significantly impact the profitability and risk factors of real estate investments. For syndicators, fund managers, and real estate developers, understanding these cycles is crucial for timing market entry, capital deployment, and investment strategies.

Real estate operates in cyclical patterns, typically consisting of expansion, peak, contraction, and recovery phases. Each phase is influenced by macroeconomic factors such as interest rates, inflation, employment rates, and GDP growth. Recognizing where the market currently stands in this cycle can help syndicators and investors make more informed decisions about when to buy, sell, or hold assets.

Macroeconomic indicators also play a key role in real estate syndication. Interest rates set by the Federal Reserve directly affect financing costs, which in turn impact investor returns. Inflation can erode purchasing power but may also drive asset appreciation. Employment growth and economic expansion create demand for various types of real estate, while downturns can lead to higher vacancies and decreased property values.

For real estate syndicators, aligning their investment strategy with economic conditions is essential. During market expansions, capital may be easier to raise, and property values may appreciate. In a downturn, syndicators must be more cautious with leverage, structure deals conservatively, and focus on long-term stability.

By understanding macroeconomic trends and real estate cycles, investors and syndicators can position themselves for success, mitigating risks while maximizing opportunities.

Read more about Real Estate Syndication: https://www.moschettilaw.com/what-is-real-estate-syndication/
Read more about Factors Affecting Real Estate Syndication: https://www.moschettilaw.com/doing-a-real-estate-syndication/

Moschetti Syndication Law Group is a boutique syndication law firm, serving small and growth-bound syndicators, as well as private equity firms. Our attorney, Tilden Moschetti, is determined to keep the firm’s ‘boutique’ size so we can tailor the services to each client’s unique needs without turning the firm into a faceless factory churning out private placement memorandums or passing unnecessary overhead expenses onto our clients. (As our client, you’ll only pay a fixed fee, so no surprises.)

As for the client experience, we give real-time answers with Tilden Moschetti without making you book an official appointment or get passed along to associates or paralegals. We’ll work with your ambitions and overall vision to help you close the current deal and fill in that ‘missing’ piece – whatever you need – to keep adding more syndications to your portfolio. We keep syndicators syndicating (TM).

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Episode Transcript

Tilden Moschetti (00:00):
Real estate markets don't exist in a vacuum,

(00:02):
and this is critically importantwhen you're putting together a
syndication or a fund to makesure that you can provide your
investors the kind of returnsthat you've told them all along,
that you can get them. My nameis Tilden Moschetti, and in this
video, we're going to go throughthose macro market tracking
trends to keep an eye on to makesure that you are successful and

(00:25):
can deliver.
When it comes to tracking themacro market, what we're talking
about is those big picturethings the entire United States,
what's going on now, reallyhere, what we're looking at is,

(00:48):
what phase of the real estatecycle are we in? Are we growing?
Are we shrinking? Where is themarket going? So we can
anticipate that the data sourceswe use are going to come from
things like the Bureau of LaborStatistics and what the Fed is
doing with interest rates,things like that. Those are the

(01:08):
tools that we will apply tomaking sure that we do that. And
here we're going to talk nowspecifically about what those
different phases of the realestate cycle are how you can
identify what phase we're in.The first phase of the real
estate cycle is expansion. Thisis when things are looking good.

(01:30):
Everything is going on right onthe macro scale, what we're
looking for is there's a robustGDP growth. GDP is massive. It's
going high. We look at majorlevels of employment are
increasing, more people aregoing back to work, so not
unemployment. Employment levelsare increasing, and this also

(01:52):
leads to more more consumerspending. So we start to see
consumer spending go up, up upas well, interest rates may
begin to slightly tighten as wedo this, in order to curb that
inflation from coming along. Andthen overall, business and
consumer confidences are superhigh. On the Real Estate

(02:15):
specific side, what we'relooking for is a major demand.
So there's a lot of demand onrents. So vacancies are
extremely low, specifically. Andwhat you're interested in is in
the property type that you'relooking at, the asset type,
whether it's multi family,whether it's industrial, whether
it's retail, whatever it is, wewant to see that that vacancy

(02:38):
factor be lower than, say,normal times. We also want to
see new new building happening.We want to see an acceleration
of development with along withthat declining vacancy, we want
to see rent growth go up. Rentgrowth is the number one
predictor of success in asyndication that rent growth

(03:01):
gives you the appreciation thatyou can pay back to your
investors, and overall, yourdevelopers are optimistic.
Everybody's looking to build in.The general feeling in the air
is very high, and that is theexpansion phase. The next part
of the real estate cycle is whatwe call the peak or over
saturation. Once we've reached acertain point, economic growth

(03:26):
starts to hit a peak, and theninflation starts taking off
massively, right? So we've hitthe absolute peak of where we're
at, inflation is going up, andas a result of that inflation
going up, central banks start torestrict the money policy. They
turn the volume down on on it.So we will see interest rates

(03:48):
rise in those buybacks massivelydecrease in what the and what
the Fed is doing. So we alsostart to see that sectors are
getting overheated. So we startto see, you know this, it's kind
of turbulent times in pricing,or in rents or something like
that. In the real estatespecific side, we start to see

(04:12):
the the demand and supplyreached kind of an equal
equilibrium. We're not seeingany any decreases in the amount
of vacancy, but we're not seeingany massive increases. It's just
started to level off rents.Growth is not happening, really
at all. It's kind of plateaued.Rents being where they're at.

(04:33):
New Construction is probablystill continuing with developers
who came in late, so they'restill developing, and they're
still trying to get it done. Sorelying on new development is
not really the best indicator.Now, as vacancy starts to
stabilize over, building startsto begin, and that's what leads
to this oversupply, becausewe've got this backlog of

(04:55):
developers, right? We've got 12to 18 months these developers
have been working on it. If theygot in late cycle, you know? And
there's six months of still, ofgood times, and now we're it's
starting to be over there inthat oversupply period. So we
see then rents start to comedown. And as rents start to come
down, that's what transitions usinto the next cycle. The third

(05:17):
part of the real estate cycle isthe slowdown or the recession.
This is after that oversupply.And so right now, we've got way
too much stuff being built.There's not the demand for it.
And so what does a propertyowner want to do? They need to
decrease rents to improve theirvacancy. It's better to have a

(05:39):
property with collecting lessrent than collecting no rent at
all. Right, so that's what, whatthey're going to be doing on the
macro scale and the country skyscale, economic activity is
slowing down. GDP starts to turnnegative. We see that inverse of
the yield curve happening. Soemployment levels are starting

(06:02):
to decline as cons and consumerspending starts to go down and
and consumer confidence startsto go down. At this point,
central banks are probablythinking about, well, we need to
at least stop raising interestrates and probably turn the
volume back up just a little bitso we might see a little bit of

(06:24):
a cut of interest rates to easeoff on the recession. But
really, we're trying, and reallythere they're trying to prop up,
not inflation, because inflationshouldn't be the problem at this
point. What? What is the problemis that employment, that's their
other part of their mandate toensure employment. So as
employment starts to go down,they're probably starting to

(06:47):
maybe cut interest rates inorder to keep employment higher.
We also see a decline inbusiness activity going on on
the real estate side, we seethat massive decrease in real
estate usage, higher vacancy,lower rents. There is a negative
rent growth most of the time, orat least stagnant right? At

(07:10):
least rent growth. Rent isn'tgrowing and staying the same.
Construction just basicallyslows. And you may see some
developers just freeze all theirdevelopment activity entirely.
Property values are starting todecrease and soften. The selling
time of property starts to getlonger and longer and longer and

(07:31):
generally cap rates start goingup. The fourth part of the cycle
that leads us into is thetrough. So that's when that
recovery starts beginning. Soonce we've bottomed out, once
we've hit that economic activityat its lowest point, that's when
this cycle starts taking place.We've got super high

(07:53):
unemployment, but layoffs startto slow, which signals, well,
maybe a recovery is coming.Central banks are probably
freaking out right now, andtheir main they're starting to
shift that interest rate lowerto try and keep the try and get
the employment levels back up aswell. Consumer confidence is

(08:16):
basically pretty low. It's nearthe bottom, but maybe it's
starting to improve justslightly. On the real estate
side, we see property values areat their lowest level. That
they're going to be high, highvacancies are there, but we
start to see some absorptionhappening. So we've we might

(08:37):
start to see some of the thevacancy rate go down just
subtly. This will eventuallylead into the the period where
we're cut, where we'reexpanding, so we might just see
that little bit of a bottomstarting to come up. Now,
actually, construction isminimal at this point, but what

(08:58):
what developers are doing isthey're acquiring land or
projects to develop. This isgenerally when they try to come
in and start working on theirentitlements, because they know
what's coming in that nextcycle, and they want to prime it
so that they can do it then bedone by the right before that
peak. My name is TildenMoschetti. I am a syndication

(09:21):
attorney for the Moschettisyndication Law Group. We went
through these, these key partsof the real estate cycle today,
mostly to help you withidentifying how where you're at
in the cycle, so that you canprovide for your investors, you
can provide for yourself, makesure that your funds and
syndications are successful. Ifwe can help you with the legal

(09:43):
compliance side or just helpingyou with putting your deals
together in the structuring sideas well, give us a call, and
let's see how my firm can helpyou. You.

Unknown (10:00):
The country for.