How do you quantify risk in real estate deals?

Short of going with a "gut check" this is risky this is not risky based on experience, how do you quantify risk? 

I've been working in the industry for a few years and everyone seems to claim better "risk adjusted returns" but I've never seen a good way to quantify this.

At most I've seen someone run a standard deviation analysis or a sharpe ratio analysis on super broad data sets like apartments over 20 years, but it doesn't really quantify risk to any specific deal. 

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Comments (3)

Apr 7, 2021 - 6:30pm

I've thought about this a lot. A risk spectrum that's hard to quantify might be the reason many of us have jobs in real estate the first place. In the securities markets all it takes is someone with a bloomberg terminal to pull up quantified risks for 99% of their potential investments. Real estate as an asset class has so many variables (many of which are tangible and can't easily be analyzed in data sets) and this makes the risk behind each investment so 'case by case.'

Pre-covid, core assets were arguably near securities in terms of ease of quantifying risk, but introducing insane volatility and an upside down office market will change everyone's risk calculations. Any value add style deal will always have a certain element of gut check involved in the risk calculation (until A.I. can properly evaluate every aspect of real estate investments).

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