What Surprises You?
By Gunnar Branson,
CEO & President of NAREIM
These are good times for real estate, so why do we all feel so anxious? 2014 was a banner year with lower unemployment, lower cap rates and higher purchase prices than anyone thought possible. Capital from around the world is flowing into real estate even though projected yields for assets purchased today are a shadow of pre-recession pro-formas. Gateway cities continue to absorb very high pricing ‚Äì above pre-recession levels - while secondary markets are warming up. Investment managers are raising capital, growing their teams and enjoying the fruit of their considerable labor.
And yet‚Ä¶things aren‚Äôt exactly the same as they have been in the past. There are new disruptive business models, new real estate usage patterns, new regulations, and new institutional capital that is actively changing how the game of real estate is played and won. Meanwhile the overall economy isn‚Äôt exactly boring either. It‚Äôs difficult to predict what might happen in the next month, much less the next year or decade. In the midst of a recovery and growth cycle, we all continue to be surprised by what happens.
And the more surprises there are, the less likely our original assumptions are correct‚Ä¶hence, our collective anxiety in a strong economy.
But what if those surprises could be turned to our advantage? What if surprise can help us better understand what is happening and what might happen in the future? Julia Galef, the President of the Center for Applied Rationality recently wrote about how surprises help us discover deeper truths and understanding ‚Äì that surprise is key to the scientific process. As she pointed out, Isaac Asimov once said that, ‚ÄúThe most exciting phrase to hear in science, the one that heralds new discoveries, is not ‚ÄòEureka?‚Äô but, ‚ÄòThat‚Äôs funny‚Ä¶‚Äô‚Äù
So, in the spirit of Isaac Asimov and Julia Galef, here are three things that surprised me in the last month: three surprises that are forcing me to question my assumptions and perhaps will help develop a more accurate picture of what is to come in 2015.
- Oil prices are half what they were six months ago. This surprised a lot of us, but we should have seen it coming. What else happens when there is more supply of something and no increase in demand? Will lower oil prices change the growth patterns of cities and suburbs? Will geopolitics change when oil based economies like Russia run out of money? How many investment strategies assume stable or rising oil prices whether they know it or not?
- Baby boomers are not downsizing. According to recent research by Nielsen, only a third of baby boomers plan to move to a new home in the next ten years. Of that third, half plan to increase the size of their homes, while the other half may decrease the size of their home, but increase the cost of that home through better finishes and better neighborhoods. How many economic predictions rely on the assumption that baby boomers are winding down?
- Interest Rates and Inflation have not gone up. Over the last few years, January has become a time when everyone predicts that rates must go up. And every year, that has not proven to be the case. Will it happen this year? How many portfolios rely on interest rates staying the same? How many strategies rely on them rising?
We live in a time of surprise whether we like it or not. This is a time when growth doesn‚Äôt happen evenly, and where loss can happen in an instant. The mistakes we make today will likely come from our own cognitive bias: the assumption that what has always been true in the past will continue to be true. Look at your assumptions the next time you are surprised. Are they right? What might happen if they aren‚Äôt? Do you need to change them?
And the next time you catch yourself thinking, ‚Äúthat‚Äôs funny‚Ä¶‚Äù there is a possibility that you are looking at the seeds of your next brilliant investment strategy.