Originally published April 2023.

In one of financial history’s key observations, Howard Marks warns, “we must never forget about the inevitability of cycles. Ignoring cycles and extrapolating trends is one of the most dangerous things an investor can do.”

Unfortunately, J. K. Galbraith observed that “there can be few fields of human endeavor in which history counts for so little as in the world of finance.”

When markets deliver growth for many years, investors believe the good times can last forever. So, major inflection points come as a shock and a challenge to their understanding of markets.

We are living through one such inflection today, and many investors are struggling to grapple with new market realities.

Fortunately, for those willing to engage with the history of property cycles, there are lessons to uncover. The past can be a guide. Remember the Mark Twain adage, “history doesn’t repeat itself, but it does rhyme.”

Here are five lessons from previous real estate cycles relevant to today’s portfolio positioning and asset selection.

1. Don’t panic

Real estate may be cyclical, but it is also resilient.

Good quality real estate generates stable cash flows. History has shown that a diversified portfolio of standing assets usually delivers a relatively consistent income, even during a downturn.

Generally, the need for real estate stays robust when growth stalls. People still need places to sleep, work, meet friends, store their goods, see doctors, get a haircut, and do many other activities.

Remember that the economic environment changes, financial conditions evolve, and property values oscillate around a long-term upward trajectory. We should expect volatility. A downturn should prompt tactical adaptions, not significant strategic changes.     

2. Start in a defensive mode

While income returns are typically resilient, capital values do fluctuate. The price an investor is willing to pay for a property reflects the present value of the future cash flows they believe the asset will generate.