"Life Cycle of Neighborhoods" - a method for evaluating commercial real estate.

When investing in commercial properties, it's crucial to consider the commercial viability of the area, along with a forecast of future property value. There are many ways to categorize areas, but one common approach among investors is to consider the "lifecycle of the area."

What is the life cycle?

Every real estate area has its own life cycle, going through periods of growth, decline, and recovery. Completing each stage of this cycle takes many years. Understanding which stage of the cycle the area you intend to invest in is in will give investors insight into when and how to invest appropriately.

There are four stages in the regional life cycle: emerging, transitioning, mature, and declining.

1. Newly developed

There are shops such as retail stores, convenience stores, beverage shops, liquor stores, fast food restaurants, gas stations, etc., but there are no major brand stores. There are also some buildings that are in disrepair and need repair and upgrading. The area is still underdeveloped. Further revitalization and development projects by the city may be needed for this area.

2. Transition

It will be distinctly different from the early stages of development. There may not be as many large brand stores, but restaurants, bars, cafes, and fashion boutiques will be more vibrant. There may also be more businesses such as design companies, software companies, etc.

3. Maturity

It has developed significantly, attracting a lot of foot traffic. There are high-quality restaurants and shops, many international and national brand retail stores, numerous office buildings, and residential properties in excellent condition.

4. Weakness

They are often old and dilapidated. Many offices and shops are vacant and unrented. Many long-established businesses are moving out, and very few new businesses are entering.

(The images are for illustrative purposes only and may not be entirely accurate.)

So, at what stage of the cycle should one invest?

In real estate investment, high returns always come with high risks. Therefore, depending on their investment preferences, investors can choose which type of asset to invest in. Each asset in its cycle has its own potential. These are some different investment preferences:

Low risk: Choose stage 3, which is maturity. Investing here is the least risky. However, it costs a lot of money, so the return on investment may not be very high. The capital is large, and reselling the asset, if needed, can take a considerable amount of time.

Medium risk: Choosing phase 2 as a transition. The properties here are still in good locations. Good quality properties, stable tenants. Landlords may increase rent slightly, or subdivide into smaller units for rent…

The risk is significant: Choosing phase 1, which is in the early stages of development, makes it difficult to rent at high prices, and the property itself isn't cheap. However, investing in upgrades or waiting for the right time could lead to price increases and even higher resale potential.

High risk: Choosing stage 4, which is a weakening phase. At this stage, investors can find properties at a low price, make significant renovations, and wait to sell. It's worth noting that this weakening phase doesn't only mean the building is of poor quality. For example, during the COVID-19 pandemic, almost all commercial properties were in a weakening phase. Therefore, finding cheap units where the owner needs to sell quickly due to inability to pay mortgages and management fees presents many opportunities. Thus, the concept of weakening needs to be viewed from multiple perspectives.

Investors will depend on what properties are available at any given time. Large investors often participate in multiple models to share the risk.

The above is the subjective, personal opinion of the author. We welcome any further sharing of experiences from those with more expertise.