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In real estate, a long term perspective is necessary for success.  Buildings have lifetimes measured in decades.  Homes are owned and generations of a family add treasured memories over that time.  First time buyers may be required to sign a mortgage which is expected to last longer than they have been alive.  Investors use real estate as a source of low-risk long term returns to pay for somebody’s pension.  In many cultures, owning land is a sign of a person’s maturity and status (e.g. Duddy Kravitz).

Within a typical business school, the lessons learned in some classes may  be incomplete: e.g. real estate cannot be treated like a “consumer packaged good” (i.e. “CPG” such as razor blades, soap or potato chips which are familiar examples in textbooks).  For a CPG, if one marketing campaign does not work, then you can stop the campaign and stop production or you can wait two years for some other “new and improved” product to replace it.   An unsuccessful real estate project costs money, and it is usually a lot of money to somebody.  Once a building is built, it costs a lot more money to tear it down.

A good project can be shown with pride for decades.  For example, construction workers proudly sign the top most girder in a building because they are confident that it will be there long enough to show to their grandchildren.

This perspective shows up in many of the techniques discussed in real estate classes.  Understanding slow moving long term trends is necessary if you want to create multi-year pro forma financial statements and a business strategy which can survive the ups and downs of several business cycles.  Our students sometimes complain about how often they are required to do a net present value (NPV) analysis.  High school students are often taught it in math classes.  Many people do not realize its importance or the many challenging extensions to a simple NPV analysis.

Still, if you forget this big idea, chasing a short run shadow can seem much more exciting.  Price bubbles are often caused by people knowingly paying a foolishly high price while expecting to sell at an even higher price to an even greater fool in the near future.  Other examples, such as the collapse of the Algo Mall in Elliot Lake (http://elliotlakeinquiry.ca/), offer memorable examples of how chasing short term profits (by reducing maintenance and repair expenses) leads to a capital loss and other costs.

It takes time for ideas to become reality in the real estate industry.  Sometimes, the time depends on construction technology and, sometimes, it depends on the speed of government.  In either case, patience and a long term perspective are needed to convert an idea and some empty space into a busy mixed use development filled with people walking from their homes, through a park, to their favourite café.

PA

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