While investors might wish for continuous growth in real estate, the commercial real estate market actually operates in predictable cycles, rather than a straight upward line. For this reason, it is crucial for investors to understand the four phases of the commercial real estate cycle. This knowledge will not only help you to realistically budget but also to remain successful through economic shifts.

What are the four phases of the commercial real estate cycle? 

1. Recovery: This is when commercial real estate experiences low occupancy and rental rates. Key indicators often include high unemployment, reduced construction activity, and stagnant rental growth.
2. Expansion: This is when commercial real estate activity begins picking up again. Key indicators often include rising rental prices, a surge in construction and job creation, and a decrease in unemployment rates.
3. Hyper Supply: This is when commercial real estate is past its peak, and there is more supply than demand. Key indicators often include softening rent growth, increased supply, and rising vacancy rates as new construction projects outpace market absorption. 
4. Recession: This is the phase when market activity slows significantly as it approaches its lowest point. It occurs well after the point of maximum price growth. Key indicators often include sharply climbing vacancy rates, a pullback in rent demand, and declining property values.

You can think of the commercial real estate cycle as a mountain climb. Recovery is starting at the base and beginning the ascent. Expansion is the steady climb toward the summit. Hyper Supply is crossing over the peak and beginning the slide down the other side as supply outpaces demand. Finally, the recession phase is the return to the bottom, where the market levels out before starting the climb again.

Best Practices for the Recovery Phase

Identifying the exact moment a market enters the recovery phase can be challenging, as it often feels like a continuation of the recession. During this period, vacancy rates usually remain high and new construction continues to lag. However, once conditions begin to stabilize and show even slight upticks, it signals the transition from recovery into the expansion phase.

Investors should maintain a high level of vigilance during this window. While the expansion phase is more obvious, it is also significantly more competitive. The goal is to act while the market is still firmly in recovery to secure the best pricing. The primary risk, however, is mistiming the entry—acting while the market is still in a true recession, when lease demand hasn’t yet returned to support your investment.

Here’s what to consider when investing during recovery:

• Monitor Economic Indicators: Prices may be at their lowest, but so is demand. Pay close attention to local job growth and absorption rates. Scoring a deal just before the expansion phase allows you to align your acquisition with the coming wave of increased lease demand.
• Target Distressed Assets: Look for properties in various states of distress or those with high vacancy that have “good bones.” These assets are often ripe for value-add repositioning, allowing you to modernize the space just as the market begins to heat up.
• Focus on Operational Efficiency: If you already own a property during recovery, prioritize tenant retention and cost management. Since new leases are hard to come by, keeping your current occupants is vital. Review your vendor contracts and streamline operations to protect your cash flow.

Best Practices for the Expansion Phase

The expansion phase may be the market’s high point, but it isn’t always easy. Growing demand often leads to a crowded field, making it harder for investors to find and secure truly high-value opportunities. While the economy is thriving—marked by job creation, rising rent demand, and GDP growth—other investors will likely have the same outlook, as this is traditionally seen as an ideal time to invest.

While the strong indicators of return on investment make this an attractive period with potentially lower financial risk, the landscape becomes increasingly competitive. The lower prices found during the recovery phase are also disappearing, meaning you may need to act decisively to secure the most attractive properties.

Here’s what to consider when investing during expansion:

• Expand Your Portfolio: Now may be an opportune time to add new investments as consumer demand is high. With the economy thriving, businesses are more likely to venture into new opportunities, making office and retail space more in demand. Look for emerging sub-markets where the “spillover” from saturated areas is just beginning to drive up property values.
• Secure Quality Tenants: In a high-demand market, you have the advantage of being selective. Prioritize credit-worthy, long-term tenants for your commercial and retail spaces. Locking in stable occupants during the peak of the cycle provides a critical financial buffer for when the market eventually cools. Keep in mind that after the expansion phase comes hyper supply. 
• Monitor Supply Levels: While construction is heating up, certain market segments can become overheated quickly. Track where construction starts are accelerating and identify pockets where there is still room for organic growth. Since we know the hyper supply phase is on the horizon, you can prepare by shifting your focus toward resilient commercial assets, like industrial warehouses or essential-service retail, that are less impacted by a sudden influx of new inventory.

Best Practices for the Hyper Supply Phase

When supply outweighs demand, prices start declining, and the market shifts to favor buyers. Simply put, investors lose a lot of the leverage they had in the expansion phase. Now, the goal shifts from aggressive growth to protecting your existing assets. 

Depending on the type of commercial real estate you own, your property may be impacted in various ways as the market becomes saturated. In times of economic uncertainty, consumer spending typically dips, causing the demand for retail spaces to decline as businesses struggle to justify high overhead. Similarly, a weak job market or corporate downsizing may erode market interest in office space, leading to higher vacancies and rent concessions. While multi-family properties are generally more resilient—as people always need a place to live—rental growth may stall as tenants gain more options and landlords compete for occupancy.

Here’s what to consider when investing during hyper supply: 

• Hold Onto Your Investments: While many investors may be spooked into selling as demand softens, those with credit-worthy tenants and stable cash flow should consider holding their positions. Real estate is cyclical; by maintaining your assets through the hypersupply and recessionary periods, you position yourself to benefit when the next recovery begins. Avoid panic-selling at the bottom of the cycle, as the expansion phase will inevitably return.
• Find Opportunities: While hypersupply is generally a time for caution, it can also reveal unique buying opportunities. As the market softens, some investors may engage in panic selling. If you have maintained strong liquidity and can identify assets with long-term potential, these distressed sales allow you to acquire high-quality properties at a significant discount before the cycle eventually resets.
• Prioritize Tenant Retention: Competition for high-quality tenants is now fierce, and you may no longer have the luxury of being as selective as during the expansion phase. Focus on keeping your current occupants satisfied to prevent turnover. This is not the time for aggressive rent hikes or neglecting maintenance requests. Consider if the cost of a vacancy outweighs the cost of making a current tenant happy. 

Best Practices for the Recession Phase

The recession phase of the commercial real estate cycle is exactly what it sounds like. But it’s not all bad news. Rent demand has slowed substantially, and the overall economy may not be performing well, but investors can remain optimistic that the next phase of the cycle, recovery, is coming. While this period is characterized by high vacancy and low consumer confidence, it is also the phase where the most attractive entry prices can be found for those who are prepared.

Here’s what to consider when investing during recession: 

• Preserve Your Cash Flow: During a recession, liquidity is your greatest asset. Avoid unnecessary capital expenditures that don’t directly contribute to tenant retention, as maintaining a healthy cash reserve provides the staying power to wait for a market recovery rather than being forced to sell at a loss. This is critical because, while the market is inherently cyclical, there is no set timeframe for how long any single phase will last.
• Identify Distressed Properties: This is the time to look for “motivated sellers” facing foreclosure or are unable to maintain their debt service. Because prices are at their lowest, you can acquire high-quality assets at a steep discount. 
• Prepare for the Recovery: Recessions are temporary. Use this time to perform deep market research and build relationships with lenders and brokers. By the time the general public realizes the market is recovering, the best deals will already be gone. Being first in line as the cycle shifts back to the recovery phase is how investors maximize their long-term returns.

Weathering the Storm and Winning the Cycle

Successful real estate investing isn’t about timing the market perfectly; it’s about understanding the cycle and adjusting your strategy accordingly. Whether you are finding bargains in Recovery, scaling your wealth in Expansion, playing defense in Hypersupply, or scouting for distressed gems in a Recession, the key is to remain knowledgeable about the market. 

Remember that while the storm of a downturn may be challenging, it is also the very thing that clears the path for the next great opportunity.

This content is provided for informational and educational purposes only and does not constitute financial, investment, tax, or legal advice. All investments involve risk, including possible loss of principal. eXp Commercial and its affiliates do not guarantee any investment outcomes or returns. Readers should conduct their own due diligence and consult with qualified financial, legal, and tax professionals before making any investment decisions.