How do you stress test your real estate risk management?

1 Define your objectives

The first step is to define your objectives for stress testing. What are you trying to achieve? What are the key questions you want to answer? How will you use the results? Your objectives will guide your choice of scenarios, metrics, and methods. For example, you may want to test how resilient your portfolio is to market shocks, how sensitive your cash flow is to occupancy changes, or how flexible your strategy is to adapt to new trends.

2 Select your scenarios

The next step is to select your scenarios for stress testing. Scenarios are hypothetical situations that reflect different levels of risk and uncertainty. They can be based on historical events, current trends, or future projections. You should select scenarios that are relevant, realistic, and diverse. For example, you may want to test how your portfolio would perform under a global pandemic, a regional recession, or a technological disruption.

3 Choose your metrics

The third step is to choose your metrics for stress testing. Metrics are the indicators that measure the impact of scenarios on your portfolio. They can be financial, operational, or strategic. You should choose metrics that are aligned with your objectives, consistent with your data, and comparable across scenarios. For example, you may want to measure the impact of scenarios on your net operating income, occupancy rate, or market share.

4 Apply your methods

The fourth step is to apply your methods for stress testing. Methods are the techniques that calculate the impact of scenarios on your metrics. They can be qualitative, quantitative, or hybrid. You should apply methods that are suitable for your scenarios, reliable for your metrics, and transparent for your stakeholders. For example, you may want to apply a sensitivity analysis, a scenario analysis, or a Monte Carlo simulation.

5 Analyze your results

The fifth step is to analyze your results for stress testing. Results are the outcomes that show the impact of scenarios on your metrics. They can be presented in tables, charts, or dashboards. You should analyze your results with a critical and objective lens, looking for patterns, insights, and implications. For example, you may want to analyze how your portfolio performs under different stress levels, how it compares with your benchmarks, or how it aligns with your goals.

6 Implement your actions

The final step is to implement your actions for stress testing. Actions are the decisions and plans that you make based on your results. They can be proactive, reactive, or preventive. You should implement your actions with a clear and timely approach, communicating with your stakeholders, monitoring your progress, and adjusting as needed. For example, you may want to implement actions to reduce your exposure, increase your liquidity, or diversify your portfolio.

7 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?