Top 5 Challenges to Apartment Asset Valuation Forecasting

: Kevin Huss introduces the Asset Valuation Forecasting: Black Swans and the Top 5 Things You Can't Control panel presentation featuring Dr. Wouter Botzen and Blerim Zeqiri at the 2013 Apartment Revenue Management Conference.Does Natalie Portman really have anything to do with apartment asset valuation? Well, not quite, but the Black Swan Academy Award winning actress still made an attention grabbing segue into the panel presentation, "Asset Valuation Forecasting: Black Swans and the Top 5 Things You Can't Control," at the 2013 Apartment Revenue Management Conference. The real black swans, as it turns out, are horrific, business changing events including terrorism, natural disasters and economic collapse. However improbable those events may be, multifamily operators likely are not doing enough to prepare for them.

“Climate change and floods may be things that you feel don’t affect you, and yet everyone seems to have a story to tell. These are events that you should be thinking about in advance before they happen,” advised VU University of Amsterdam Assistant Professor Dr. Wouter Botzen, who joined Alliance Residential Director of Revenue and Research Blerim Zeqiri on the panel moderated by Harbor Group Director of Revenue Management Kevin Huss.

Botzen says Hurricane Sandy hitting New York City in 2012 is the classic black swan: an extreme event with a 1,100-mile wide wind field creating floods resulting in $50 billion in losses to some 88,700 affected buildings. Those losses might have been mitigated had the general public heeded expert advice to prepare for extreme weather events and flooding in the aftermath of Hurricane Irene in 2011. “Yet despite Hurricane Irene in 2011, when 300,000 people had to be evacuated from areas in the New York metro, only 20 percent of land owners took specific measures to reduce flood risk prior to Hurricane Sandy.”

According to the panel, the Top 5 Black Swan events that multifamily housing owners need to prepare for include local, regional, and global incidents of both natural and human causation: 

  1. Natural disasters and Climate change: Including global warming, rising sea level, change to flood zones, earthquakes, tsunamis, tornadoes and wild fires.
  2. Man-made disasters: Nuclear accidents, oil spills, chemical accidents, infrastructure and logistical accidents and blackouts.
  3. Financial events: Global recessions, housing crises, and localized macro swings in employment and unemployment.
  4. Political/Social events: social upheaval, political crises, terrorist attacks, crime and war.
  5. International events: Global economy shifts and changes to sovereign GDP as seen in countries such as Greece and (more recently) China. 

While Zeqiri profiled real-world examples of Black Swans including train derailments, chemical spills, and the accidents at the Chernobyl and Fukushima nuclear reactors, perhaps the most impactful example was that of a government shutdown. Using historical data on the impact of the 1994 government shutdown, Zeqiri detailed how the effect to U.S. Treasuries and corresponding interest rates could result in apartment owners having to raise rents $280 per month simply to cover an increase in debt service. “All of the sudden it makes a lot of our deals not look as profitable as we think they are,” Zeqiri said. “The truth is we simply don’t underwrite to these risks.”  

Botzen agreed, and cited myopia, overconfidence, and a misperception of risk as primary reasons why organizations do not prepare adequately for the unknown and the improbable. “Still, every night on the news there is some kind of disaster happening somewhere in the world, and property losses have been increasing and trending upwards since the 1950s. Why are disaster losses increasing? It’s not just climate change, we are also living with more people in more areas that are at risk, and we are exposing ourselves to more hazards.” 

For more download the Asset Valuation Forecasting: Black Swans and the Top 5 Things You Can't Control presentation

This information was presented at the 2013 Apartment Revenue Management Conference.

 

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