Real estate investing is both a fine art and a rigorous science. The art is understanding the qualitative aspects of what makes a good property, while the science is being able to not only crunch the numbers with precision, but also to understand what those numbers mean. Nick Millican, chief executive of London-based Greycoat, has made a career of melding the art and science of real estate investment.

Since joining Greycoat in 2012, Millican has been involved with the investment and asset management of projects with an enterprise value of in excess of 2 billion pounds (approximately $2.5 billion). On the face of it, all this commercial real estate in the center of London doesn’t seem to have much in common. There’s the glass and steel building, Premier Place, on Devonshire Square. There’s 15 Suffolk Street — a six-story office building constructed in the mid-1950s using Georgian architect John Nash’s original facade after the site was bombed during World War II. Then there’s Stirling Square in St James’.

What ties all these buildings together, says Nick Millican, is the X factor needed for investment in central London — or almost any other major city.

“These are beautiful, striking properties and exude class — no matter their age — furnished to a high quality with everything modern businesses need,” says Nick Millican.

Having a good eye for real estate investment opportunities is similar to having a good eye for fine art. It requires an understanding of the qualitative factors involved in the art form and an appreciation for what undefined criteria might drive price.

But then there’s also the science of real estate investing. And that starts with an understanding of the cycles of the market.

Real Estate Cycles Explained

The quantitative methods for understanding real estate investment are good utilization of numerical data, mathematical models, and statistical analysis to measure, compare, and evaluate the different aspects of a development project. But such quantitative measures will only get you so far. First, you need to understand where you are in the real estate cycle. Because real estate, like many other markets, is indeed cyclical. The investors who understand this most keenly are often the ones that do the best.

There are basically four main phases of the real estate market. There is recovery, then expansion, hyper-supply, and finally, recession. Expansion and hyper-supply never really happen without eventual recession, followed by a recovery. And while the length of the phases is often unpredictable, there are investment strategies that make it easier to invest successfully across all four.

Recovery is when the market hits the bottom of the cycle and is the first stage after a recession or pullback. Occupancies will be low with minimal leasing activity. This is a time to be opportunistic, say experts like Nick Millican.

Next comes expansion, as the market shows signs of rebounding. Job growth is steady, housing is balanced, and new construction increases. This is the perfect time for development.

Hyper-supply is at the tipping point between balanced supply and demand, and oversupply. Some investors sell assets ahead of a property value decline, while others seek opportunities.

Recession, often the result of overinflated growth, is a time to take advantage of distressed assets at steep discounts compared to replacement costs.

Where We Are in the Current Cycle

The four phases of the real estate cycle move in a wave that rises and falls. The difference between real estate and other types of assets is that with the right strategy, investors can successfully invest across all four phases of the cycle.

The current phase of the real estate cycle is a little more nuanced than previous cycles, like the boom of the 1980s or the bust and eventual recovery of the 2007-08 financial crisis — but it can be placed within the traditional framework.

Prices and tenancy rates may be down, but the reasons for this are well known. Inflation is still high and the economy and business community are still feeling the effects of the pandemic hangover. It’s the hangover, combined with macroeconomic factors, that experts like Nick Millican advise real estate investors to monitor closely, particularly how businesses react to these dual conditions.

After a few years of low tenancy rates, people are returning to the office in bigger numbers. But they’re returning in different ways. No longer going in five days a week, many workers now go in only a few days a week — and when they go in, the emphasis is on teamwork and collaboration. This means the types of spaces that commercial lessors will be looking for are bound to change. A premium, thinks Nick Millican, will be placed on collaborative workspaces in city centers where there are more social things to do than simply work.

“I don’t think we get back to exactly the way things were in 2019,” Millican muses. “I think that one of the things that it has made people do is say, ‘If we are gonna drag our staff 45 minutes away from their house to come and work in the same place, then we have to do a better job of making that place somewhere they’d actually like to be.’”

Still, while we’re not quite there, Millican sees a recovery on the horizon and advises commercial real estate investors to act accordingly. Now is the time to be astute with investing and search for opportunistic gems that you can develop into the office spaces that future demand will require.

“The key is to understand not only the four phases of the real estate market cycle, but also the variances that you may see,” says Millican. “The four phases don’t usually happen in equal periods of time, nor do they hit different types of commercial real estate the same way.”

Nick Millican notes that a recession may come on quickly, but that doesn’t mean the recovery will also be short-lasting.

Geography and asset class are also a factor.

“For instance, even in the same phase of the cycle, different types of office space may react very differently. Suburban office markets may not ever recover, while city center markets may achieve rapid growth,” says Nick Millican.