How do you assess risk exposure in a changing world?

1 Identify the sources of risk

The first step is to identify the sources of risk that may affect your commercial real estate investment. These can be categorized into four types: market risk, property risk, financial risk, and operational risk. Market risk refers to the changes in demand, supply, competition, or regulations that may impact the value or performance of your property. Property risk refers to the physical condition, location, design, or functionality of your property that may affect its attractiveness or usability. Financial risk refers to the debt, interest rate, cash flow, or tax implications of your investment. Operational risk refers to the management, maintenance, leasing, or legal aspects of your property that may affect its efficiency or profitability.

2 Quantify the impact of risk

The second step is to quantify the impact of risk on your commercial real estate investment. This means estimating the probability and severity of each risk factor and how it may affect your expected returns, cash flow, or capital appreciation. You can use various methods and tools to quantify the impact of risk, such as scenario analysis, sensitivity analysis, Monte Carlo simulation, or risk-adjusted return on capital (RAROC). These methods help you to measure the variability and uncertainty of your outcomes and compare them with your risk appetite and objectives.

3 Mitigate the risk

The third step is to mitigate the risk by implementing strategies and actions that reduce the likelihood or magnitude of the negative effects of risk. You can mitigate the risk by diversifying your portfolio, hedging your exposure, improving your property, negotiating better terms, or outsourcing your operations. You can also mitigate the risk by transferring it to a third party, such as an insurer, a lender, or a tenant, who is willing to bear the risk for a fee or a share of the benefits.

4 Monitor and update the risk

The fourth step is to monitor and update the risk by regularly reviewing and evaluating your commercial real estate investment and its environment. You need to track the performance and condition of your property, the changes and trends in the market, the feedback and satisfaction of your stakeholders, and the compliance and governance of your operations. You also need to update your risk assessment and mitigation strategies based on new information, data, or events that may affect your risk exposure. By monitoring and updating the risk, you can identify and address any issues or opportunities that may arise in a changing world.

5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?