Scenario Planning Drives Value
The current real estate down-cycle has resulted in occu- pancy declines, seen investors flee and illuminated many things, one of which being that existing models for real
estate value-creation are flawed, according to Al Beaudette, CEO
of Attentus Advisors in Irvine.
Have you ever wondered about the person that sold all their
stock just before the crash, or the real estate investor who sold at
the top of the market? What did they know that you didn’t? What
metrics did they consider? Was it luck or something else? Beaudette
speaks with Real Estate Southern California editor Natalie Dolce about
how he believes that “something else” is scenario planning.
Define what scenario planning means and how real estate
investors can benefit.
Beaudette: Scenario planning is an advanced approach to asset and
portfolio planning that is designed to maximize value. It involves
the integration of data that are essentially known facts with outside
uncontrollable elements that will drive alternative performance
outcomes. Herman Kahn of the Rand Corp. described it as thinking the unthinkable. Thinking the unthinkable allows you to look
at the real estate world very differently than your competitors.
“Thinking the unthinkable
allows you to look at the real
estate world very differently
than your competitors.”
As it relates to the investor, it is essentially an approach that
some may call gaming the system. The difference is that you are
not gaming your competition, as most do in the real estate sector.
Rather, you are gaming against nature. By integrating traditional
data sources with models that look at the what-if, you get an entirely different set of potential outcomes.
What are the steps involved for someone looking to utilize
this approach to investing in real estate?
Beaudette: You begin by defining your investment strategy. People invest in real estate for different reasons: some for wealth
creation, some for cash flow and some for wealth preservation.
Once you know your strategy, you can begin to use data sources
to zero in on markets, product types, operating strategies and
even tenant mixes, which will in theory deliver the results that will
meet your financial objectives. Next you will need to identify the
outside influences that could positively or negatively impact the
results you are trying to achieve. Then, integrate these elements
into your operating strategies for your assets.
How do you build an asset strategy?
Beaudette: Each asset is unique and has its own story. Your challenge is building that story. You bought that asset to meet certain
investment parameters. What is your plan to make sure it meets
those parameters? Is it repositioning, leasing, more efficient property management, cost controls or other factors? Once you determine what you need, you will want to create a written asset plan.
Now integrate outside factors that may combine in complex or
unusual ways, creating alternative performance outcomes. What
do you need to do to respond if one or more of those variables
surface? Review that plan at least every quarter so you can make
adjustments quickly, prior to these external factors impacting the
performance of the asset. Few people and organizations take the
time to do this.
Do you find that other real estate companies take this
Beaudette: There are numerous people and organizations that
subscribe to scenario planning. They seem to sell when everyone else is buying and buy when everyone else is selling. When
you look at their performance, they always seem to be ahead of
the game. Why? Because they view the performance of their real
estate investments as part of a larger game. They recognize that
traditional tools yield only a part of the real estate investment and
Do asset operations factor into scenario planning?
Beaudette: Your operations are linked directly to your asset
strategy. The alternative performance outcomes I’ve discussed
become integral to your asset operations. In a competitive real
estate environment, product differentiation often comes down to
very subtle differences. One of the most important differentiating
factors is people. People are what make real estate work. It is the
people that attend to the details of managing an asset, effective
marketing and tenant relations.
Do these concepts apply to other real estate vendors and
Beaudette: Absolutely. These same principals apply to vendors
and service providers in any industry you can think of. Many of
the principles outlined in scenario planning came directly from
the military. Substitute your industry and you’ll see the same principles apply.—SOCAL