Environmental, political and organizational risks are becoming increasingly important for executives and stakeholders in real estate. For organizations, this means taking a holistic view of risk and moving away from direct financial measures alone.
The theme of non-quantifiable risk is gaining ground as a key aspect of risk management. This is the case for both public and private real estate organizations. While its definition and parameters can vary, non-quantifiable risk is an important consideration for large-scale organizations. A recent article from McKinsey highlights the prominence of the problem—global banks, for example, are not exempt. Even with their expansive risk management programs, they still have issues measuring and protecting themselves due to its abstract nature.
Non-quantifiable building risk generally lacks any measurable and technical financial impact. It can refer to risks related to politics, facilities, environment, security or corporate governance. They do, however, cause problems that result in indirect financial loss. Such examples include changing business conditions, staffing issues, accidents and legal non-compliance. They may rarely occur, but they have a high impact on an organization when they do happen.
Measuring these risks using traditional risk assessment methods can be tough. Most consultants tend to focus on operational strategy and contingency planning to mitigate them. Yet there should be less focus on trying to measure the impact. Instead, organizations should focus on planning so that they’re prepared if and when these risks come to fruition.
For property owners and managers, non-quantifiable building risk can hit at various levels. This includes capital investment planning, insurance or financial processes like reporting and compliance.
Managing Non-Quantifiable Building Risk in Real Estate: Three Common Mistakes
Focusing too much on measuring risk in financial terms
All too often firms try to measure and “underwrite” non-quantifiable risk. The issue with this is that it can result in a narrow framing of risk. For example, firms try to quantify the legal costs of reporting non-compliance. By doing so, they may get the statistical information they need to operate, but they often miss long-term considerations such as reputation loss or employment impact. Loss aversion in this case is more direct than broad-based. An alternative is to look holistically at wider organizational impacts of risk and mitigation strategies. This can be more productive than trying to determine an exact dollar figure for a specific event.
For example, unforeseen building repairs may cost more than regular maintenance. From this perspective, organizations need to bolster their direct capital investment plans with larger, more strategic processes. This includes portfolio-wide capital contingency planning or allocating resources for more proactive building maintenance. For this reason, we recommend a facility inspection once every three years.
Read more: How to set up a risk assessment template
Lacking a macro view of markets, economies and industries
All too often, organizations focus solely on direct business risks. They ignore larger, long-term structural themes such as technological or social change. While these changes are slow and gradual, they can still cause significant impact. This is especially if an organization is moving in the opposite direction of the trends. For example, organizations that did not invest in green technology in the last decade now face building risks they could have avoided (from a capital and environment compliance perspective). Strive for a balanced focus of immediate problems and long-term, structural issues. This will ultimately help you better adapt to changing market conditions.
Having siloed data operations and lack of connection to organizational risk management
Developing vertically integrated and siloed risk management platforms is problematic. Too much segregation between departments leads to a lack of transparency. And with a lack of transparency comes greater risk. For example, the environmental team focuses on environments, while the property management team focuses on building-specific problems. This approach can cause your company to overlook organization-wide risks. The environmental and property teams may actually find that a lack of software for tracking building performance is a mutual issue. Identifying common organizational risks can result in better risk management, driving more efficient capital investments.
Proactive Building Risk Management
To mitigate risk, create a business process that is quantifiable, documented and reportable. This shows that you take this issue very seriously. We recommend implementing a process wherein you demonstrate that you are proactively managing your assets. For example, if you manage a higher education institution, are you making building upgrades before they are past due? This protects against negligence and liability at the facility. Are you investing in areas that will see long-term returns via student enrollment and retention? This positions you as a good steward of the assets and structures in your care.
Make proactive building risk management part of your organizational culture. This will go a long way in ensuring you’re managing your organization’s vision and enduring success.
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Photo Credits: Shutterstock / Goran Bogicevic