Golf and real estate investment: Comments on risk and reward - by Daniel Calano

Daniel Calano, Prospectus, LLC

Many of us real estate professionals have undoubtedly been playing work related golf tournaments this spring. For some, it is bliss, and for others it is agony. For some, the risks of playing badly are just too much, and for others with confidence there is no risk at all.

Risk taking and risk aversion are interesting concepts in real estate development, and I wondered how golf could be instructive in the field. A few years back, Wharton Business School researchers studied golf with that exact question. Without getting into the statistical weeds, they watched PGA professionals putt in a few hundred tournaments over time. They were interested in whether and when pros would take a risk and putt aggressively for a birdie, as opposed to putt conservatively, take an extra stroke and be happy with a par. They concluded that the risk of getting a bogie weighed far more heavily on them than the thrill of getting a birdie, and thus even the best typically putted conservatively to ensure a par.

There were a few other conclusions that came out this. First, and other studies have concluded similarly, age plays a part: older golfers tend to take fewer risks than younger golfers. Second, if things aren’t going well, golfers tend to play more conservatively in hopes of winning something, and conversely, if things are going well, over confident golfers tend to go for more birdie putts. It is also true that golfers are more nervous and risk averse in the beginning of the round than towards then end. This may occur because some are “not in the game” and have to take risks to get in before the game ends.

Real estate investors and developers are “the pros” of real estate. Those that have been in it a long time, are less likely to take wild risks. They have seen the ups and downs in their competitions, and may well be happy with a par and cringe at risking too much and getting stuck with a bogie. As the saying goes, some are in the camp of “heads I win, tails I get money back.” Contrast these players with younger people, who are anxious to get in the game. By nature, those newer to the profession are willing to take larger risks because they do not perceive them as risks. They perceive most projects as opportunities.

Whether younger or older, in the beginning of our current market, just coming out of recession around 2010, most were conservative waiting to see others take the first steps. They perhaps bet on smaller projects, or started a long-term process on larger ones but with smaller amounts of money at risk. Once things got going, they placed bigger bets, and people with successes became more confident and played more aggressively. Those wanting to get into the game, pushed harder and met with fewer obstacles of pessimism or conservatism, thus finding more acceptance of project proposals.

Okay, so the golf analogy has been pushed to its limits, and it is true that real estate is different from golf. It is much longer term. Professionals start projects that will only be culminated over 2-5 years, some longer. It is hard to stop the process once started, when large sums of acquisition and permit funds have been expended. Confident investors/developers push ahead to be on top with winners; others are happy with their score and are perhaps looking ahead to the next cycle.

One large question that remains for me, is whether there has been a paradigm shift and whether taking “risks” these days have potentially less fearful results than in the past. Why: recourse is rare; institutional money is desperately seeking yield in a no yield environment; foreign countries are seeking U.S. safe haven; money continues to be incredibly cheap; and most of the investment money can withstand a downturn and hunker down for the next upswing. Maybe, risk is perceived as less of a threat, and thus risk aversion behavior in our field has changed. Time will tell.

Daniel Calano, CRE, is the managing partner and principal of Prospectus, LLC, Cambridge, Mass.