Failure is not fun. We think about failure, mostly to prevent it from happening.
In real estate, the solution often seems to be “be lucky”. Regardless of whether they were smart or stupid, people who invested in real estate for the last decade or so have made a lot of money. They benefited from a rising tide.
That cannot continue forever. I say this knowing that a surprising number of people think that the rules of supply and demand which apply everywhere else do not apply to real estate. For various reasons, the real estate market tends to experience endogenous cycles, where everybody agrees on a trend and the trend changes because people act on that agreement. I do not know when prices will start to fall, although somebody once told me that it would start on a Thursday.
In commercial real estate, the numbers are even bigger. If the value of an asset falls far enough, even excellence in operations may not be enough to compensate for the capital losses. When that happens, the “successful” bidder who followed the trend and won that savage bidding war for that trophy building will be the one who has trouble sleeping at night.
After prices have fallen, there is not much that can be done (although people will probably find reasons to blame somebody else). With this in mind, there is some value in thinking carefully about failure: to calm excessive optimism with some reality and to see the benefits in a good failure.
This post recommends two podcasts with some provocative thoughts.
- I recently listened to an outstanding podcast from Stanford Entrepreneurial Thought Leader series from the person at Google X who leads the charge on their moonshot programs. (His TED Talk on the same topic is shorter, has more examples and fewer thoughts.) Google has radical ideas and radical ideas often fail. It is interesting to note the most of their failures are small, low cost and not too public. I have never heard the idea of a “pre-mortem” discussed so clearly, or connected so emphatically to the idea of a learning organization. Google may have its cool innovations, but the real estate industry is also experiencing changes which will weed out those who are unprepared.
- An older podcast, by the guys at Freakonomics, talks about the many benefits of quitting.
Failing to succeed is not always a sign of doing a poor job. And, even if not a complete failure, not all projects are as successful as expected. It is not just about a risk vs. return trade off. What most people misjudge is that, if done right, every kind of failure is an opportunity.