How does the production cycle affect real estate asset supply in the short run?

The production cycle in real estate refers to the time it takes to develop new properties from the initial planning stages to completion and availability for occupancy. In the short run, the characteristics of the real estate market imply that the supply of real estate assets is relatively inelastic and slow to adjust.

This inelasticity occurs because real estate development involves lengthy processes, including securing financing, obtaining permits, conducting construction, and ensuring that the necessary infrastructure is in place. These factors contribute to a situation where it is difficult to rapidly increase supply in response to short-term changes in demand. Consequently, even if demand surges, developers cannot quickly pivot and deliver additional units or properties, leading to a slower response time in the market.

Furthermore, the inherent nature of real estate projects requires careful planning and execution, often resulting in completion times that span months or even years. As a result, during short-term fluctuations in market conditions, supply does not adjust swiftly to meet immediate demand, reinforcing the notion of its relatively inelastic nature. This characteristic impacts price levels, as a constrained supply can lead to increased prices when demand rises suddenly, while an oversupply may take time to be absorbed even when demand decreases.