By Spencer Levy, CBRE
In the wake of COVID-19, many sophisticated commercial real estate advisors and investors are rejecting the old industry adage that “never fall in love with your real estate.”
That’s because commercial real estate – like so many investment decisions – is influenced by basic human emotions. And unlike stocks or bonds, office buildings, shopping malls and warehouses don’t trade like commodities.
Commercial real estate decisions by investors and occupiers cannot be entirely data-driven. Of course, in-depth financial analysis, sophisticated data and powerful algorithms are important. But data is often significantly impacted by human emotion. That’s why psychology can be as influential in real estate decision-making as cold, hard math.
At the height of the COVID-19 pandemic in September 2020, CBRE’s biannual review Office Occupant Sentiment Survey found that 39% of large companies planned to significantly reduce their commercial real estate footprint (i.e. reductions of around a third or more).
But in our last Spring 2021 surveyas the world began to emerge from the pandemic, that number anticipating deep reductions was down to just 9%.
What explains such a clear difference? Emotion.
In 2020, there was no end in sight to COVID-19 occupancy restrictions, so survey respondents may have overreacted under duress. As restrictions eased in 2021, occupants followed suit with less gloomy forecasts of reduced office use. In other words, data must be viewed through the prisms of human emotion and bias.
Many investors who are not commercial real estate specialists are unduly influenced by media reports. Some investors may be wary of types of assets classified as “distressed” by the press, for fear of risking disapproval from their sources of capital.
Negative headlines often generate great public interest, especially predictions of the “end of retail” or the “end of office”. However, these titles may not paint the full picture. For example, the best office and retail assets are currently trading globally for more than their pre-COVID-19 values.
Get off the beaten track
No matter how creative your ideas are, the incentive to follow the herd of big-budget investors remains. The penalty for those with an alternative approach can include rejection by large institutional investors.
Legendary investor Sam Zell is an exception to this way of thinking. Known as a maverick, Zell used his creative investment ideas to become a billionaire, as well as chairman and CEO of several REITs in traditional asset types. Arguably, his most notable example of non-compliance was investing in prefab housing space – trailer parks – which are now considered one of the hottest types of assets among investors. sophisticated institutions.
Recent demand for other once overlooked areas of operational real estate like data centers and life science facilities shows the value of thinking outside the box.
Emotion got us in, emotion got us out
Throughout the COVID-19 pandemic, emotion has clouded much of our analysis. But emotion will also get us out of the crisis thanks to pent-up demand. A fundamental truth about behavior is that humans crave connection. People are social and want to return to gathering places. This includes returning to the office to communicate, network and collaborate with experienced colleagues and leaders who inspire them.
Behavioral economists believe that how you feel influences how you think. This contrasts with mainstream economists, who believe that all economic activity can be reduced to numbers.
When behavioral economics’ foremost proponent, Richard Thaler, won the Nobel Prize in Economics in 2017, the definition of economics broadened. Dr. Thaler’s groundbreaking theories offer valuable lessons on how to deal with pandemic-induced shifts in demand, because the same emotions that led so many of us to assume the worst at the start of the pandemic will likely help us to move towards a better future.
Alfred, Lord Tennyson wrote: “It is better to have loved and lost than never to have loved at all. That may be true, but in commercial real estate, it’s better to love and earn.
— Spencer Levy is Global Chief Client Officer and Senior Economic Advisor at CBRE. Follow him on Twitter at @SpencerGLevy.