A&A Report: 2015 – A Year for Surprises
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A year ago, if someone stood up at a NAREIM meeting and pronounced that oil prices might drop by half before year’s end, very few would have thought it credible. Last year, when someone might declare that interest rates and inflation would not increase before late 2015, they might have been considered a bit optimistic.
For years, rationality has posited that as baby boomers aged, they would downsize their use of residential space—and yet, according to a recent survey by Nielsen, two thirds of those over 50 years old do NOT plan to move in the next ten years. Half of the remaining third plan to INCREASE the size of their homes while the other half may decrease size but increase cost for better locations and better quality construction.
What a surprise! How many investment strategies have assumed that oil prices would stay high, that inflation would rise and that boomers would downsize? How much could we have planned for these surprises and how much can we anticipate the surprises to come?
Fortunately, these surprises may be telling us something. As Isaac Asimov observed, “The most exciting phrase to hear in science, the one that heralds new discoveries, is not, ‘Eureka!’ but, ‘That’s funny…” These surprises and others may reveal new discoveries about the future of the industry—and provide strategic advantages to the savvy investor and asset manager.
As described by NAREIM President & CEO Gunnar Branson, the real estate investment process is actually a form of the scientific method: “We come up with a hypothesis of how the market will evolve, and we test it with capital. Real estate is the only business where practitioners have to figure out what the future will look like in 10 years—and put their money behind it.”
Discussions throughout the NAREIM A&A meeting in January revealed a long list of recent surprises affecting the real estate investment business. “Every day we wake up to something new, and we need to consider how much it might impact our business,” said Chris Hartung. “Should it concern us that Switzerland has decided they’re not tying their currency to the euro? What does it mean when the Italian 10-year bond is trading below the U.S. 10-year bond?”
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