Risk analysis uncovers how new fundamentals impact asset values

Risk is an intrinsic feature of commercial real estate investment, yet quantifying it is surprisingly elusive. Without risk, investors wouldn’t generate returns; despite this key role in an investment, more owners than you might think fall short in accurately measuring risk or its impact on investment quality. Traditionally, the cap rate has represented the summary of a property’s downside exposure. It is used as an all-in-one expression of market demand, asset quality, property value and return. Cap rates offer a clear path to making side-by-side comparisons between prospective investments—but as a measurement of risk, it falls short. No single criteria can fully capture the nuances of so many factors. For this reason, it is important to do a multi-factor risk assessment.

To go beyond cap rates and provide better insight into risk exposure, valuation professionals have begun analysing a robust list of characteristics that affect investment performance individually then quantifying how each category impacts a property’s valuation. This approach is a powerful tool that gives investors both a deep understanding of the investment’s vulnerabilities and the opportunity to develop targeted defensive strategies to drive value and enhance returns.