New Era Demands New Thinking
“Real estate as an asset class has matured. Market participants need to realize this and make the appropriate adjustments.”
In complicated conditions, organizing principles matter. When a disparate array of circumstances present themselves, the
advice frequently comes, “Connect the dots.” Many of us will recall puzzle books from childhood where “connect the dots” brought us to a solution that showed a line drawing that revealed the puzzle’s theme, the unifying concept that makes sense of an otherwise confusing array of facts.
It is difficult to apply this approach to the emerging trends we discern from our review of the real estate industry this year. Survey responses, commentary from interviewees, and a deep dive into third-party data lead persuasively to the conclusion that the outlook is complex.
Let’s note an important distinction: complex does not mean the same thing as complicated. A 500-piece jigsaw puzzle is complicated, but it is static. Complexity is descriptive of systems, especially dynamic systems, where the elements of the system interact with each other in subtle ways. Those interactions may bring different results in the short term versus the long term, because complex systems evolve and adapt. Sometimes that evolution is surprising.
Surprise is actually a key feature, and a positive one. In a simpler view of things (however apparently complicated), there is some “correct” answer to the question, “What is going to happen?” That is because the modeling of the future is linear, much in the way that lines are the basic tool in connecting the dots. In a world where “what’s going to happen” is not so easily predicted, we need to retain a capacity for surprise. A degree of uncertainty is what makes for innovation and creativity. It is the space where our behaviors make a difference.
So instead of using a connect-the-dots model, think of this year’s trends as circles in a Venn diagram. One difference between a dot and a circle is dimension. Dots are one-dimensional; circles have area in mental space. Trends will overlap, indicating that they interact, and over time those interactions (sometimes involving more than just two circles) foster new conditions that can alter either the features of the trend, its relative strength, and even its duration. We aren’t in coloring-book world anymore.
So, for instance, we will be discussing a trend among investors that proposes a selection process directing some toward “transcyclical” markets and others toward “pro-cyclical” markets. That trend has implications for the volume of debt and equity capital that will be required going forward. Some of the industry’s “dry powder” may remain in reserve indefinitely, especially if slowing long-term growth accurately depicts the coming decade.