👋👋 Good morning real estate watchers! Today, we are going to talk about how the best time to start building is when everything looks like a post-apocalyptic wasteland—high vacancies, collapsing rents, total despair. Basically, the same conditions under which every WeWork expansion plan was written.

But first, here’s what we’ve been paying attention to this week…

1️⃣ Mortgage Musical Chairs: Homeowners are strategically converting their properties into rentals instead of selling at a loss, with many leveraging their attractive low-rate mortgages (3% to 5%) to cover carrying costs and generate income. (Globe St)

2️⃣ Shelter Shenanigans: Housing drove a significant 63.5% of the Consumer Price Index (CPI) inflation in 2024, with shelter costs accounting for 58% of total inflation despite moderating from 6.2% to 4.6% between 2023 and 2024. The persistent housing inflation stems from a lack of affordable housing supply and rising construction costs, challenging the Federal Reserve's efforts to bring inflation back to its 2% target. (NAHB)

3️⃣ Sellers Show Up, Buyers Ghost: More homeowners are listing as mortgage rates dip, but buyers remain hesitant, keeping pending sales at a five-month low. With prices still rising and economic jitters lingering, motivated buyers hold the negotiation power. (Redfin)

4️⃣ Fannie & Freddie Flee: Fannie Mae and Freddie Mac are shutting down their New York offices, citing Attorney General Letitia James’ alleged “corrupt and dangerous practices.” The move follows a Justice Department investigation into her mortgage oversight. (HW)

5️⃣ AI Moves In: A new survey shows 82% of Americans now use AI for housing insights, with ChatGPT and Gemini leading the pack. Still, real estate agents remain the most trusted and accurate source of market information. (Realtor.com)

TOP STORY

It’s a commonly held belief that the smart investor acquires assets early in the real estate cycle, when prices are low, and develops them later, as fundamentals improve and values rise. Yet, new analysis challenges this orthodoxy. Hines Research finds that development returns relative to acquisitions are actually highest at the start of the cycle, and shrink as the cycle matures.

This means developers are essentially financial hipsters; they only want to pour concrete before it’s cool. Put simply, the moment when conditions look the most unappealing may, in fact, be when development offers the greatest upside.

Hines introduced a framework that quantifies real estate cycles through buy, hold, and sell phases. It marries fundamentals—like rent growth and vacancies—with capital market dynamics, supported by decades of historical data from sources including CoStar, JLL, CBRE, and NCREIF.

Risk is central to this framework. Hines defines it as the probability that market prices will be lower five years into the future. A composite risk multiplier of one indicates a neutral environment, while values below one mean less risk, and those above one signal elevated risk. Across more than 80,000 historical observations since 1990, this measure provides a map of how cycles play out.

In the Early Buy phase, conditions appear weak on the surface: high vacancies, falling rents, and low tenant demand. But these symptoms reflect a correction already underway, which often means prices are attractive. Hines reports that the risk of further price decline is, on average, “32% lower than neutral” at this point.

That helps explain why this phase tends to attract private high-net-worth investors and family offices, rather than large institutions. Today, many U.S. office markets fall into this category.

The data also shows that risk does not remain constant. As cycles progress, fundamentals strengthen, rents rise, and optimism spreads. But risk quietly builds beneath the surface. By the Late Buy phase, the risk multiplier crosses above one. In the “Prepare to Sell” phase, it peaks at 1.37—when markets look their strongest on the surface, but pricing has become “quite rich,” in Hines’ words, and capital markets are overly enthusiastic.

This paradox highlights the danger of relying on surface-level fundamentals. It also suggests that waiting until conditions look “safe” to break ground may actually expose investors to the riskiest part of the cycle.

Hines’ analysis of NCREIF data comparing acquisition and development projects illustrates the trade-offs. “Other than the Hold phase, returns on development are higher in just about all phases,” the report notes. But those returns are front-loaded. As cycles progress, absolute development returns shrink, at times falling below the thresholds needed to compensate for risk.

The implication is clear: while investors may not want to pour concrete in the earliest part of a downturn, this is an opportune moment to option land, secure entitlements, or negotiate with sellers at favorable terms. As Joshua Scoville, Senior Managing Director and Global Head of Research, puts it: “While you probably wouldn’t want to break ground in the earliest part of the cycle, this may be an opportunistic time to option land for the invariable improvement in market fundamentals that tend to occur as the cycle progresses.”

For investors, this calls for a shift in mindset. Instead of defaulting to the old playbook of “buy early, build later,” the data argues for a more flexible approach. Early in the cycle, when competition is thin and pessimism high, developers can lock in sites and prepare for growth. Later, when markets are hot and risk premiums elevated, strategies like build-to-core with long-term holds can help mitigate thinner margins that would plague short-term merchant builds.

The debate over buying versus building is less about following conventional wisdom and more about understanding timing, risk, and cycle dynamics. As Hines Research concludes: “Our research helps to debunk the idea that buying early in the cycle and building later is the best path forward. Indeed, the picture is much more complex—and in fact the inverse may even be true.”

For investors, the actionable takeaway is to remain nimble. Those willing to tolerate early-cycle uncertainty and option land when prices are low may be positioning themselves for stronger long-term returns than those who wait until conditions feel safe. In a market where perception and timing often diverge, the winners may be the ones who build when no one else wants to.