Beyond the status quo: How real estate leaders navigate disruption

Introduction

Evidence suggests that many people fear change, preferring to stick with the status quo.  As the drivers of the built environment change more suddenly and rapidly, real estate professionals who adopt adaptive strategies should be able to deliver better performance for their stakeholders.  

In this article, I will demonstrate the implications of not adapting and illustrate how some real estate professionals have adapted. 

Response to disruptions affecting the built environment

A few weeks ago, I, along with more than 5,300 other real estate professionals, attended the Urban Land Institute’s (ULI) Fall Meeting. Many of the sessions touched upon disruptions affecting stakeholders in the real estate industry, including climate risks, increased energy demand, insurance availability and cost, and tax changes.  

Attendees had varied familiarities with the nuances of these macro disruptions, how to assess the impacts of relevant disruptions on their companies/organizations, and whether as well as how to implement preparatory and responsive actions. In an era fraught with unfamiliar types (i.e., technological) and behaviors (i.e., more intertwined, higher velocity) of risk and value drivers, preparing for and reacting to disruptions in ways that satisfy stakeholders’ criteria is increasingly difficult.  

A few attendees suggested that many real estate industry professionals have a fear of change. Though I do not have data on who does and does not, I would hypothesize that they are right. In the widely referenced 1988 academic paper Status Quo Bias in Decision-Making, William Samuelson and Richard Zeckhauser shared findings from their decision-making experiments indicating that people are more likely to stick with what they already know when given the choice between the status quo and something new.  

Case studies

Among real estate professionals, an example might be how they assessed urban office markets pre-pandemic. Some professionals may not have evaluated how evolving technology that enabled virtual work could address problems facing some employers (i.e., high lease rates or productivity of commuters) and disrupt certain markets (a topic that I touched upon in a pre-pandemic article).  Another example might be illustrated by why Blackstone recently liquidated an investment in senior housing.  According to the WSJ, the firm tried to apply the familiar “buy it, fix it, sell it” strategy only to find out that the asset class’ operationally intensive business model made a turnaround more complex than in other forms of commercial real estate.

In Disrupt With Impact: Achieve Business Success in an Unpredictable World, Roger Spitz lays out an AAA (Antifragile, Anticipatory, and Agility) Framework, which business leaders can use to help them prepare for and navigate disruptions (pp. 272-279). The anticipatory “pillar” suggests integrating the ramifications of exponential change and varying degrees of uncertainty into decision-making.  Embracing change in this and other ways can foster better performance. If the above-mentioned real estate professionals had used this approach, they certainly would not have predicted what ended up happening, but they might have made different strategic choices with positive impacts.  

ULI Fall Conference case studies

At the ULI Fall Conference, some presenters demonstrated that, at least to some degree, they were not afraid to change their strategies in light of disruptions:  

Owners and developers of buildings in high fire risk areas:

• Fear: Cost of ownership and values of buildings in risky areas are volatile
• Adaptive actions that move past the fear:

• Implement building hardening and vegetation clearance, knowing that the community might take similar steps, and future insurance costs could go down
• Reduce insurance costs by acquiring and holding large portfolios with uncorrelated (i.e., diverse geographies and asset classes) and high-risk properties 

Developer of affordable housing:

• Fear: Rising land and building costs 
• Adaptive actions that move past the fear: 

• Use lower-cost concrete rather than higher-cost mass timber because the lower structural cost was more important than fully adhering to sustainability criteria
• Build in a location that is difficult because of its location, as doing so can lead to ease of future projects   

Utility supplying electricity:

• Fear: Data center and electric charger station stakeholders are expecting accelerated expansion of the electric grid, but if the utility paid for the costs upfront and their expected demand did not follow, the utility and its ratepayers could be left on the hook.
• Adaptive actions that moved past the fear:

• California Public Utilities Commission (CPUC) approved interim streamlining and acceleration of approvals for connections at the transmission level as long as applicants pay for transmission infrastructure costs upfront. 

Conclusion

While I do not have sufficient data to evaluate the quality of the above profiled leaders’ decision process or the outcomes, I can give them credit for being willing to move beyond the status quo.

Adapting to a changed environment can be critical to optimizing risk-return outcomes.  Leaders who soundly assess what has or may have changed have a better chance of charting their companies through the inevitably choppy waters ahead compared to other leaders.

illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.

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