Real estate development is a risky endeavor and so a big part of this business is managing those risks. There's planning risk, market risk, construction risk, bad-drawing risk, and the list goes on. But it's also important to keep in mind that the risks you worry about the most will invariably change throughout the course of each real estate cycle.
For example, early on my career, we worried a lot less about construction cost escalations. We'd plug in a 2-3% annual increase into the pro forma and then move on the next line item. Of course, during the pandemic, this is almost all we worried about. What's our exposure? Do we have enough of an allowance? How are our subcontractor contracts drafted?
This particular panic has subsided since then, but now there's new panic: closing risk. We've spoken about this before, but given the number of condominium completions expected this year, I think it's going to remain top of mind for at least another 18 months (in the Greater Toronto and Hamilton Area).
The simple point I'd like to make today is that it's important to worry about risks, but it's equally important to worry about the risks that don't seem like risks at all today, which is admittedly trickier. Because you just never know. It's hard, for instance, to predict exactly when your largest trading partner might suddenly start an arbitrary trade war.
But it can happen, as we've learned.
Cover photo by Tiomothy Swope on Unsplash
Over 4.2k subscribers