With the current economic expansion moving ahead in 2005, the key issue for real estate is: will the normal relationships between overall economic activity, demand for space, increasing demands for money, and rising levels of property development prevail as in past cycles?
Or will be unusual curt flood of capital into real property markets cause different cyclical outcomes?
In the normal business cycle, as the economy moves out of recession into expansion, growing levels of business activity raise demand for both money and commercial space. These increases put upward pressure on interest rates and occupancy levels in commercial space. Rising interest rates, plus current high vacancy rates and lower rental rates, continue to inhibit new commercial property construction. Also, investors are drawn away from real estate investments into competing asset forms such as stocks of successful companies.
These conditions produce only gradual absorption. Vacancies are falling and rates are stable or rising, but neither holding far enough to justify a new development, especially since interest rates rise along with other competing investments.