Optimism: Property's Greatest Strength, And Its Greatest Enemy, In 2021
It is just over three years since Toys R Us tumbled into administration in the UK, and the property business that owned the UK stores collapsed into receivership. The portfolio carried debts of £363M and just £177M in assets.
You would have to be an optimist to think there was a profit to be made here, but cometh the hour, cometh the man: UK investor Tim Knowles' Acepark Ltd took on the portfolio. Earlier this spring Acepark accounts confessed the outcome as the remaining stores fell in value faster than they could be sold. "It now looks unlikely that sufficient funds will be realised to make an overall profit for the group," official accounts said. That golden sunrise ahead turned out to be an oncoming train.
This is not an atypical story because the property industry has an optimism bias. Other examples are not hard to find: a consortium of investors completing Europe's largest ever property deal on the day Lehman collapsed in 2008; or the Chinese developer who built 700K SF of offices for Chinese companies in the docks of east London, only to find he built it and they didn't come (yet).
And in 2021 that bias could become a serious liability.
“I have no doubt that optimism bias will have played a part in the decision making regarding real estate during the pandemic and that it will have led to some unwise decisions being made," psychologist Claire Beazley-Mungovan said.
The suggestion of an oversupply of optimism this year might seem crazy. The last 12 months have scarcely encouraged optimism: rather the opposite, if you are into offices, shops, hotels or almost anything other than warehouses.
Besides, optimism gets things built. It gets deals over the line, tenants through the door and it probably gets you up in the morning. Without a massive shot of optimism, the property industry would scarcely exist. Take it away and who in their right mind would launch projects with values measured in eight or nine digits, with uncertain outcomes and long lead-in times? Buying or building a property is inherently a belief that the future will be better, and that values will go up. You can't short-sell a building.
This is all true. And it completely misses the point.
Property’s optimism problem is not that it is optimistic by nature or habit, but that it doesn’t know when to turn the optimism off. According to people with experiences as different as the industry’s wise old heads and psychologists, this makes the real estate business particularly vulnerable to expensive misjudgments.
Those misjudgments are particularly prevalent during an unexpected crisis (like the coronavirus pandemic) and afterward, when things turn out to be less bad than expected (like the economic recovery from a pandemic).
So how does a sensible property person learn to keep their optimism safely under control in 2021?
How An Optimist Thinks
First, let’s clear up the definition. The standard view would be that an optimist has a glass-half-full, sunny-side-up approach to life, seeing opportunities where others see problems. Psychologists say that is partly true, but what is actually going on is that hard-core optimists think the world more or less revolves around them.
Ken Gray is a psychologist and director of the Edinburgh-based Keil Centre, a specialist UK consultancy that says it “aims to support the development of capable, healthy and safe people”.
Building on the work of University of Pennsylvania professor Martin Seligman, Gray said the difference between optimists and pessimists turns on three pivots in the internal monologues we tell ourselves about our place in the world.
“If something positive happens to a pessimist they think it is temporary, they say I just got lucky. If something positive happens to an optimist they tend to think it is permanent, they say I’m a lucky person,” Gray said.
“The pessimist will see something good happen and locate the cause of the good thing outside themselves somewhere. The optimist, instead, rates their own contribution to the good outcome, and will say they deserve that outcome."
Gray is quick to point out that a certain amount of optimism is essential for good mental health: It protects us from the slings and arrows life will throw at us. But too much can be dangerous. In the end it can morph into a kind of narcissism in which everything is “all about me.” And it is somewhere on the road to this unhappy destination that things begin to go badly wrong for a business. Or, as Gray puts it, “faulty processing, poor decision-making, always testing the limits, and taking too many risks.”
Optimists In A Crisis
Unfortunately, at times of crisis the last thing anyone wants to hear is a pessimist, whilst the optimists they prefer to listen to are peculiarly likely to have been misunderstood. That is the conclusion of Beazley-Mungovan, who has made this a specialism.
“In an uncertain or rapidly changing business situation, the optimist’s relative inattention to detail, failure to seek new information and selective inattention to unpromising data can lead to poorly informed decisions,” she said.
"All industries have, or should have, their pessimists. They are the cautious higher level managers whose instinctive pessimism qualifies them to do the job of reining in the activities of the gung-ho optimists when market conditions are unstable.”
Beazley-Mungovan hopes that the pandemic will have put pessimists “on high alert” with the result that some of the biggest risks can be mitigated.
Is that how property people see it?
Luck, Not Judgment
Nick Leslau says he’s an optimist, but the investor has a reputation that points the other way. Leslau, chairman of Prestbury Investments, cemented this public image in 2006 when he called the top of the market 18 months earlier than everyone else and promptly sold out. He was something of a Cassandra figure, his regular column in trade publication Property Week constantly warning that the market was overheated, only for his voice to be ignored. Come 2008 and the Lehman Brothers crash, it turned out he was right.
Leslau prefers to call this good luck, an expression that careful readers will associate with the less optimistic personality type described by Ken Gray. But if we needed a clue to Leslau’s approach it is in the risk-averse name of the business for which he is now best known, Secure Income Reit.
As it happens, Leslau said today he is optimistic about recovery from the pandemic. We can be pretty sure that “the coiled spring of demand, the animal spirits” will ensure a strong bounce back, he told Bisnow. Leslau goes so far as to predict a post-pandemic boom. He is pretty optimistic too about the future of the workplace. “I don’t subscribe to the hysterical view that offices have changed forever,” he said.
Yet Leslau is clearly not an optimist in Gray’s terms. “I try never to confuse a bull market with me being a genius," he said. "My advice is never confuse yourself. I’ve never tried to tell myself I’m a genius, because if you do that you are sunk. The people who think they are infallible are on a destiny to fail.
“I got lucky in the 1980s, and by 2006 I saw the market getting hotter, and I got more scared, and we sold out and went to cash. I could see our leverage was way too high, and we could have been tripped up. We were lucky to sell out on time, and I’ve never forgotten that, because back then I used to wake up in the middle of the night thinking if I’d sold out six months later than I did, I’d have gone bust,” he said.
It's All About Facts
Economics is famously the dismal science, and if we were looking for property's pessimists this is where we ought to find them. Yet Colliers Chief Economist Walter Boettcher talks like an optimist.
“I always look in the latest data for a means of finding the future positives. That kind of comes with the job as an economist working in the property sector,” Boettcher said. “And the fact is that a large part of our [economic] activity depends on spontaneous optimism, not looking at the numbers and working out the probabilities. Maynard Keynes said that enterprise will fade and die without optimism.
“Striking the balance can be hard — in 2008 I put up a slide of a Jeep coming to [a cliff's] edge, and that was my opening slide — so I hope I’m not blinkered. But I tend to accentuate the positive, and look for the upside.”
Because Boettcher is an optimist, the way he works to control his optimism is instructive. It’s a mix of self-discipline and history.
“If I find a news story running against what I believe and I catch myself wanting to dismiss it without reading it carefully, I have to make myself [read] it. And I think that is about laziness to challenge one’s views, because that requires a bit of work,” Boettcher said. The danger, he said, is “not about dismissing data that doesn’t fit, but not going looking for it,” and looking for it is a helpful corrective.
Boettcher said he agreed with Leslau that sometimes optimism flourishes because it has not been tempered with experience. If this is right, the property industry’s problem is not too much optimism, but too little historical perspective.
There’s some merit to that argument,” Boettcher said. “I think back to a conversation with one of the grand old men of property in 2007 who told me we were in for a grim time, because he’d seen three or four downturns already, so yes there is a sobriety at the senior levels which tones down some of the exuberance in the newer parts of the market.”
Riding The Tiger
Controlling optimism is hard, Gray said. “If the mores of an organisation or an industry reward unbridled optimism, then it's going to be difficult to break the habit, and for some people it will be even harder because they have a very high degree of optimism or a low degree of awareness about their optimism bias,” he said.
Wise heads agree that the risk of dangerous optimism is higher with younger property people who have yet to experience a serious boom-to-bust cycle, and for those who work in relatively new sectors that have only experienced growth, like the UK's purpose-built student housing business. Is this true?
Anthony Laville launched Birmingham-based Volume.Property in 2017. Today he is behind a 155-bed PBSA scheme in central Birmingham with another 107 beds starting on-site this year. In theory Lavelle ought to be a hard-core optimist, but turns out to be a textbook study in how to keep optimism under control.
“At this stage in my business, I kind of have no choice but to be optimistic about PBSA,” Laville told Bisnow. “And all the indicators for the sector are good, including our bookings for next year. I don’t think the sector is heading for a bust, but certainly some local PBSA markets have oversupply, and some operators will suffer.”
Laville does what optimists often find very hard: He seeks out evidence that unsettles the rosy view. “I listen a lot, I ask a lot of questions, I look at other schemes and ask, do they actually have the bookings? Because I know exactly what it is like not to be able to let a property, and you have to protect yourself,” he said.
“I think for some operators and developers, the last few years have been a long winning streak, and I can see why they might get complacent.”
If you want to keep a lid on optimism, Gray recommends managers make it possible to deliver bad (or not very good) news, and make it possible for teams to engage in the kind of so-called 'negative brainstorming' that Laville and Boettcher deploy. They also need to recruit people who aren’t automatically inclined to think the only way is up.
And of course the easiest way to keep optimism in check is to risk losing lots of your own money. Leslau and Laville clearly have that at the front of their minds.
Maybe some combination of these techniques will keep the property industry's optimism bias under control as the U.S. and UK economies unlock and resume growth.
But if, as 2021’s economic recovery gathers speed, the optimists grab the wheel, we’ll all have an early opportunity to find out.