Article | Creating Resilience

Falling in Love: A New Way to Think About Commercial Real Estate

28 Oct 2021 4 Minute Read

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In the wake of COVID-19, the old industry adage to “never fall in love with your real estate” is being called into question. 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 warehouse facilities are not traded like a commodity.

Commercial real estate decisions by both investors and occupiers can’t be entirely data driven. Of course, deep financial analysis, sophisticated data and powerful algorithms are important, but data is often significantly impacted by human emotion. That’s why psychology can have as much influence on real estate decision-making as cold, hard math.

COVID-19 Duress

At the height of the COVID-19 pandemic in September 2020, CBRE’s semiannual Office Occupier Sentiment Survey found that 39% of large companies planned to significantly reduce their commercial real estate footprint. But in our latest Spring 2021 survey as the world began to emerge from the pandemic, that number was down to only 9%.

What accounts for such a stark difference? Emotion. In 2020, there was no end in sight to COVID occupancy restrictions, so survey respondents may have overreacted under duress. As restrictions eased in 2021, occupiers followed suit with less dire predictions of reduced office usage. In other words, data should be considered through the prisms of emotion and human bias.

Headline Risk

Many investors who aren’t commercial real estate specialists are unduly influenced by media reports. Some investors may become wary of asset types categorized as “in trouble” by the press, lest they risk disapproval by their capital sources.

Negative headlines often generate great public interest, particularly predictions of the “end of retail” or the “end of the office.” However, those headlines may not mirror reality. For example, the best office and retail assets currently are trading globally for more than their pre-COVID values. 

Think Outside the Box

No matter how creative your ideas are, the incentive to follow the herd of big-money investors remains. The penalty for those who have an alternate approach may mean rejection by large institutional investors.

Legendary investor Sam Zell provides an exception to this way of thinking. Known for being a maverick, Zell used his creative investment ideas to become a billionaire, as well as Chair and CEO of multiple REITs in traditional asset types. Arguably, his most notable example of nonconformity was investing in the manufactured housing space— trailer parks—that is now considered one of the hottest asset types among sophisticated institutional investors. The recent demand for other formerly overlooked sectors of operational real estate like data centers and life sciences facilities shows the value of thinking outside the box.

Emotion Got Us In; Emotion Will Get Us Out

Throughout the COVID-19 pandemic, emotion has clouded much of our analysis. However, emotion will also lead 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 going back 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, unlike traditional economists, who believe that all economic activity can be reduced to numbers. When Richard Thaler, the greatest advocate of behavioral economics, won the Nobel Prize in Economic Sciences in 2017, the definition of economics expanded. Dr. Thaler’s groundbreaking theories offer valuable lessons on confronting pandemic-induced variations in demand, as the same emotions that led so many of us to assume the worst early in the pandemic likely will help us move toward a better future.

Alfred, Lord Tennyson wrote, “‘Tis 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 win.  

This article is based upon insights from the CBRE Institute.

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