1. What’s the best way to make better real estate decisions?
Make better real estate decision-makers.
And by the way, don’t try to replace them with mathematical models.
2. How do you make better real estate decision makers?
And by the way, don’t train them to be better bureaucrats; train them to recognize the difference between good locations and bad locations.
3. What’s the hot trend among chain operators today to make better real estate decisions?
Replacing decision-makers with mathematical models and training the remaining ones to be better bureaucrats.
The best real estate dealmakers are not 25 year olds with MBAs. They have been in the business for 15 years or more and have forgotten more about evaluating sites than the youngsters have learned. The good ones have learned to use technology to work more efficiently and bring valuable information to their fingertips instead of guessing about things that can be known.
Why does it take so long to get good at site selection? The best athletes peak in their late 20’s and early 30’s. Some of the most prolific and creative computer programmers are under 30. The maximum age for a fighter pilot is between 27 and 30 years old depending on the branch of service.
The reason it takes so long is that it’s complex and the human brain needs to see many examples of what works and doesn’t work in order to develop a framework for evaluating a new site.
Does that mean that real estate dealmakers and investment committee members should have a minimum age requirement to participate in decision-making? Of course not. However, there is a lot that can be done to accelerate and enhance the learning process for all of the players involved in the development and optimization of the bricks and mortar network.
Back in 1993 I quit my job as Director of Acquisitions for a commercial real estate firm because I was obsessed with Geographic Information Systems (GIS). The industry was still picking up the pieces from the Savings and Loan debacle and repentant souls everywhere swore they would do more research before investing next time, much like a partygoer who promised to never drink again. This seemed like the perfect time to create a software-based real estate research system that would help investors make better decisions. One morning in 1994 I was attending a breakfast to hear an update on the commercial real estate market (“stay alive ‘til ‘95” was the theme) and I cornered the guest speaker, Hugh Kelly, to ask his opinion of my game plan. Hugh had already achieved “luminary” status as chief economist for Landauer Associates, so I asked him if he thought that the commercial real estate industry was ready to use computer-based research tools. His response was something like this: “They certainly should, but I’m concerned about who can effectively use GIS for this purpose because you need to be a combination of an economist, a cartographer, a computer geek, a desktop publisher, a statistician, and a real estate expert to produce meaningful results.”
Wow, I was depressed. I hadn’t met a single person that fit that description in the commercial real estate industry, and I certainly didn’t have those qualifications. Now I look back on 17 years of building, selling, and supporting these tools I understand how challenging it can be to use this technology in decision processes.
However, even a visionary like Hugh Kelly couldn’t have imagined that the Internet and software technology would make it possible to put easy-to-use maps, demographic information, and aerial imagery on every desktop practically for free!
So now we have a chance to rethink this. We still need economists, cartographers, computer geeks, desktop publishers, statisticians, and real estate experts; but we don’t need to combine them all into one superhuman individual who creates simulations of the marketplace for us as we evaluate real estate opportunities. We can create information systems that provide rich visualization and reporting tools for the real estate experts to use on their laptops, tablets, and smartphones.
We can train students and seasoned professionals to enhance their “mental models” as they draw upon databases that contain examples of winning and losing investments from the past.
The winners of the next decade will find the right combination of people, processes, and tools to maximize their return on capital invested in real estate. The cornerstone of their success will be training everyone in the business from the CEO to the VP Real Estate, to the research team, to the dealmakers in the field to combine their experience and the remarkable power of their brains with timely, digestible information about opportunities.
A simulation modelling entrepeneur used to say “all models are wrong, however, some are useful”. This highlights the concept that the application of models, be they math or mental, are imperfect, but valuable nonetheless. The U.S. Air Force learned during Vietnam that the effectiveness of a fighter pilot increased dramatically after 10 combat missions. This resulted in massive spending to train pilots in highly realistic combat training, using some modeling. The amazing win/loss ratio enjoyed today is directly attributable to that effort.
Is there an analagous training opportunity in commercial real estate site selection?
Thanks for this great example of how training works! You noted that it took “massive spending to train pilots in highly realistic combat training, using some modeling.” When the application is aerial combat the stakes justify the investment. The same is true in chain store real estate, but it’s still cheaper to open a bad store than to lose an F-35 ($156 million each). To be honest, I don’t think the chain store industry has grasped the value of training for market planning and site selection and there is definitely an opportunity for a big return on investment in this area. Training programs abound, but most use basic classroom methods and have failed to take advantage of new technology that is both powerful and cost effective using elearning and simulation. I’ll be talking about this a lot in coming blogs!