Page 38 - Trump University Commercial Real Estate 101

TRUMP UNIVERSITY COMMERCIAL REAL ESTATE 101

ship will take some time to respond to the captain ’ s orders. If he becomes
impatient and orders an even greater course change — before the ship
has responded to the first order, now he has over - corrected.

This also happens in real estate markets. Investors make snap
judgments based on strengths that they see right now . They put new
construction in motion. Keep in mind that it can take three years or
longer for the planning, permitting, and construction phases to be
completed. In the meantime, investors at first are delighted to see even

more demand in the market. That generates even more construction
activity.
Finally that great ship — this load of real estate deals — eventually
comes online and the market has overcorrected, just like the ship with
the impatient captain. There ’ s now a glut of new properties available,
and they ’ re overpriced, too. Why? Because they were built when prices
were high. Their costs were therefore higher.
Now the supply suddenly outstrips demand, and price - cutting
takes hold. To make matters worse, phase I of a buyers ’ market also
tends to coincide with stagnant or negative job growth in the area.
As the market cools, companies stop expanding and may even begin

to lay off workers. Retail receipts drop, office space becomes abundant,
and apartments begin to see higher vacancies. These are the character-
istics of an oversupplied market.
When the new commercial space comes online, there will be more
of it than there are people or businesses to occupy it. Desperate owners

forget their rosy profit spreadsheets and slash rental rates to get that

space filled and start seeing income — any income.
In addition to the key factor of supply, job growth is a signifi cant
market force. In a Buyers ’ Market, Phase I, there is none. Jobs had
started to slow down or leave the area in the previous Sellers ’ Market,
Phase II. At the beginning of a Buyer ’ s Market, Phase I, job losses are
still taking place.
The market will reach a point at which unemployment peaks and
investment property values will decline to their lowest level of any
phase in the cycle.

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