Does anyone ever find that real estate investing is overly simplistic, a bit elementary. Slap a 3% market/expense/rent growth rate, pull a sometimes arbitrary list of lease and sale comps, +50-75 bps on exit cap (or -50-75 bps depending on fund strategy), claim a YoC of x% on a capex project based on the resulting guestimated rent increase, etc.... You could probably go on for days with some of these more arbitrary assumptions.
It seems like there should be a better way, and the emotional pull of an interesting/fun property, or bonus compensation based on acquisition volume seems it would muddy the waters, making it difficult to hit what are sometime excessively optimistic goals.
At what point does the industry change, adapt to the world of data and advanced analytics that we live in, implementing predictive analytics, modern portfolio theory, machine learning for data analysis? Are there any firms currently taking an abnormally research weighted approach to their strategy? It seems like there should be a better way about this, but none (at least publicly) are touting any advanced research driven strategies.
If any of you know of firms doing this, or experienced strategies involving this, would love to hear about them.
I can tell you it’s already happening.
you know of any firms doing this in the commercial space?
Freddie Mac and Fannie Mae
Other companies don’t have the money to burn
Yes, I’m constantly surprised at how things are presented at our physical property ICs.
Many funds I see don’t seem to have a risk boundary. Sure they say what the target returns are, but not what risk will be taken.
We are slowly but surely convincing our funds to devise systems looking at return per unit of risk. And also looking at units of types of risk in portfolios.
Thinking about how much lease up risk, credit risk, financial risk, development risk our funds are taking.
It’s hard work
But quantifying risk is difficult. Why would I do that when I can just tell you how much money we'll make? /s
I think this depends entirely on what specific discipline within real estate you are talking about. For acquisition of an existing operating property, sure...there is enough data available to pinpoint where certain line items will trend in the future.
Not really the case for development. There are so many hundreds of changing variables in a development project that getting into this level of granularity is a total circle jerk that is a waste of time. Provided you are in the ballpark on your cost and income/expense assumptions, that should give you a decent barometer for whether a project will be successful...beyond that, hardcore data analytics isn't going to tell you how fast your project will get entitled, what contractors will bid on your job based on how full their pipeline is, etc.
I don’t think you can go hugely in depth and I don’t argue for huge granularity.
You can however isolate the key drivers of risk and return and acknowledge them. Things don’t always have to be and arguably shouldn’t be an exact science. But just because something is difficult, challenging or nobody has done it before doesn’t mean you shouldn’t attempt to do it.
My personal view is the real estate industry is littered with industry specific phraseologies and actors should make more of an effort to make things more understandable for the lay person.
Speaking in terms of risk and return and showing the main drivers of both in projects, acquisitions or on a portfolio level could open up new pots of capital for those who manage to crack how to do it.
I know - easier said than done.
I agree with Ricky Rosay above, personally.
Specifically for development, so much simply cannot be modeled. How hard will your architect push the consultants to finish their structural analysis? How will the Interior Designer create something in the middle of a column due to poor coordination, then subsequently require more weeks to get done? This is before a shovel hits the dirt too. How do you model in the weather risks that delay construction months? Or the City Inspector who red tags your job over a fire rating in the parapet sections? There are just so many variables that cannot be computed into excel.
Yes- you said we don't need to get this granular. But those granular things impact your development. I haven't even touched leasing assumptions.
Lastly, real estate is known for the asymmetrical data and inefficiencies that allow the returns to be made.
agreed. let's be honest. commercial RE/development have been around for a LONG time. If there was a benefit and money to be made by having that level of analysis...it would have been done already. Fact is most real estate comes down to buy for a dollar sell for two. holding for cash flow really has no place for that level of technical analysis. the 3% inflation claim i've heard argued before...and yes it's not perfect. But some people try to implement a monte carlo simulation, which has equal degree of imperfections and is infinitely more complicated. I've tried using other econometric style logic to real estate...and in the end what I found is KISS principal largely prevails. The benefit/additional accuracy we achieved was marginal at best, while adding significantly more time to the underwriting and making lots of other people (investors, JVs, etc) uncomfortable becaues they felt that they werent understanding the asset play. Hate to be the one saying "thats the way weve always done it"...but in this case I do think it applies.
I think also one of the points of development is keep your time frame as short as possible. The longer your time frame, the more that those variables come into effect. If you go outside of the X months to entitle/permit, Y months to build, and Z months to lease-up stabilize, for a combined timeline of 36 months, you're probably in trouble because the market shifts and investors are impatient.
Eveniet et maiores facilis cupiditate modi molestiae. Nesciunt non suscipit nihil aliquam voluptas fugiat sit.
Dolores rem consectetur voluptatem atque possimus vitae. Dignissimos nulla necessitatibus est ut asperiores qui sit iusto. Suscipit molestiae qui porro praesentium dolor omnis et.
Facere quae labore sapiente autem ducimus ad atque dolorum. Doloribus at id quia hic maxime consequatur. Doloremque voluptatem suscipit laborum adipisci soluta ut non. Sed autem sint ullam ea quis omnis omnis. Commodi et recusandae maiores nisi voluptatem quibusdam quia.
Quia ut sed nobis error. Iste perspiciatis officia recusandae fugiat quo.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...