Advice: Quantifying Every Element of a Decision

My CEO has tasked me with quantifying certain esoteric deal making decisions and I'd like to know if anyone else has done the same. Sounds somewhat Bridgewater-esq and I'm sure it's been attempted so opening up the conversation for advice.

Example - In the past we have not made decisions because it might impact our reputation with tenants or the larger CRE community. However, like every decision, we are implicitly saying that if we do X it will decrease our future cash flows by X amount and therefore is not worth it. If you had to fall back on a promise to tenant but in return got paid $10 billion to do so, it's hard to argue that this is not worth the reputational damage.

Many decisions we make it's hard to pinpoint how it will impact our value. The most concrete measures are rents and construction costs & timing. When you start to get to lease up timing and investor interest on sale it starts to get more nebulous. Maybe a catering service offered to tenants will be break even from a pure P&L standpoint, but it will have some positive impact on the value of the project not captured by the P&L. How do we quantify that without reams of data?

I think these types of questions run to the core of the inefficiency of CRE but are something small shops like ours struggle with, especially when we have to deal with LPs that don't understand anything besides impacts to the model.

I'd love to have a conversation with anyone that has thought long and hard about these types of decision making considerations.

Comments (13)

Most Helpful
Jul 25, 2019

I think the root of the question deviates from CRE entirely. The question is: How do you quantify human psychology?

Your (extreme) example makes sense. However, there are some people who value their word/ promises so much that they cannot be bought. There are some people who can be bought for $10.00.

How do you quantify each individual psyche? What price do you propose on anything? If life could be completely quantified, it would not be fun. There is no creativity in anything.

TLDR: Your boss is asking for the impossible and has potentially lost his/ her mind.

"The three most harmful addictions are heroin, carbohydrates, and a monthly salary." - Nassim Taleb

Previously Malta Monkey

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Jul 25, 2019

Ignoring my extreme example - one thing we have considered is applying confidence levels to weight decisions.

For example - we know one floor layout looks better than another but can't say for certain if it will necessarily increase rents. However, we have slightly more confidence that the space will lease up in the underwritten time frame. I want to put a value on this confidence vs just telling our capital partner that we are doing something that may take extra effort from the team and doesn't have a direct impact on the model results.

Does anyone else have issues with communicating to their capital partners? I'm a finance guy so my job is to bridge the gap between the other finance guys sitting across the country and our seasoned leasing and construction teams that just have an eye for things but aren't always able to communicate this in a way that resonates.

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Jul 27, 2019

There are companies that do comprehensive market analyses for developers. Unit layouts are covered in those analyses.

But I think you're speaking to the "psychology" of choosing an apartment. Or the financial impact of good design. McKinsey has written on this topic: https://www.mckinsey.com/business-functions/mckins...
You should track data points like lease-up rates in your projects versus the competitors. Or lease-up rates between the various architects you use.

Your pitch could involve minimizing downside risk: if there suddenly is too much supply, your units will be superior and will rent up faster, etc... Quantifying this is borderline impossible without vast data sets, however. You'd be making up numbers to appease your boss--and that's a decision only you can make.

So as other users have mentioned, you can't solve this problem without large data sets.

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Jul 26, 2019

I think you actually do need "reams of data" to do it right. That's an advantage that huge companies like Greystar, etc. have. They have such huge data sets that they can do regression analysis and identify the value of some of these line items in a statistically significant way. Not so easy for the smaller shops.

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Jul 26, 2019

I'd probably start looking for a new job

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Jul 28, 2019

This tbh.

There is nothing worse (imo) than you're boss coming to you with an esoteric concept or idea that he has in his head and him asking you to do work that he should probably spearhead on his own free time.

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Jul 27, 2019

.

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Jul 29, 2019

Agreed. I even think making cap-rate assumption 5+ years out can be a worthless exercise, thus IRR based decision making becomes wildly speculative. The smartest real-estate guys I know are YoC and CoC driven - how much will the project cost, how long will it take to stabilize the property, what is a realistic stabilized NOI margin, etc...

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Jul 29, 2019

It's impossible and foolish to quantify every element of the decision making process. Some decisions need to be solely looked at from a qualitative perspective. That said, a mix of XNPV analysis combined with probability assumptions can allow you to look at certain project decisions from a unique perspective, for example comparing different lease options while making assumptions about probability of vacating after the base term, forward tenant credit risk, pro-rata impact on cap-rate, etc...

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Jul 31, 2019
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