How can you effectively account for uncertainty in commercial real estate forecasts?

1 Define your scenarios

One of the first steps to account for uncertainty is to define different scenarios that reflect the range of possible outcomes for your market, property, or portfolio. Scenarios are not predictions, but plausible stories that describe how various factors and events could affect your commercial real estate performance in the future. You can use historical data, industry trends, expert opinions, and your own assumptions to create scenarios that cover the best case, worst case, and most likely case for your forecast.

2 Quantify your risks

Once you have your scenarios, you need to quantify the risks associated with each one. Risks are the potential deviations from your expected forecast that could result from changes in market conditions, demand, supply, costs, revenues, or other variables. You can use different methods to measure and express your risks, such as standard deviation, variance, confidence intervals, probability distributions, or sensitivity analysis. By quantifying your risks, you can assess the likelihood and impact of each scenario on your commercial real estate objectives and performance.

3 Apply your models

After you have quantified your risks, you need to apply your models to generate your forecast for each scenario. Models are the mathematical formulas or algorithms that you use to estimate your commercial real estate values, cash flows, returns, or other metrics based on your inputs and assumptions. You can use different types of models, such as discounted cash flow, capitalization rate, net present value, internal rate of return, or others, depending on your purpose and preference. By applying your models, you can produce your forecast for each scenario and compare them to see the range of possible outcomes and trade-offs.

4 Test your assumptions

The next step to account for uncertainty is to test your assumptions and see how they affect your forecast. Assumptions are the hypotheses or beliefs that you use to simplify or approximate your reality and input into your models. You can test your assumptions by changing them and observing how your forecast changes in response. You can also use tools such as Monte Carlo simulation, which randomly generates thousands of scenarios based on your assumptions and their probability distributions, to see the distribution of your forecast outcomes and their confidence levels.

5 Communicate your results

The final step to account for uncertainty is to communicate your results clearly and effectively to your stakeholders, such as investors, lenders, clients, or partners. You need to present your forecast in a way that shows the uncertainty and the risks involved, as well as the opportunities and the recommendations. You can use different formats and techniques to communicate your results, such as charts, graphs, tables, dashboards, narratives, or others, depending on your audience and context. By communicating your results, you can convey your credibility, transparency, and confidence in your commercial real estate forecast.

6 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?