Mark Zuckerberg once said that the best advice billionaire entrepreneur Peter Thiel ever gave him was, “In a world that’s changing so quickly, the biggest risk you can take is not taking any risk.” Think what you will about Zuckerberg and Thiel, but at least in the commercial real estate market, there’s some truth in that statement, says Nick Millican, Greycoat’s chief executive.
The key is to know when to risk — and for what reward.
Another applicable quote — albeit one that’s been around for centuries — is “Fortune favors the bold.” So prevalent in human history has the phrase been that it has become a common family motto, sage advice uttered by coaches in halftime locker rooms, and the mantra of high-flying Wall Street traders.
It’s a proverb that cuts to the truth of many business situations, encouraging investors and entrepreneurs to push the limits of what they can achieve, and acknowledging the risk involved in pursuing a winning idea. If the risk is acceptable, the call is to commit to the strategy and don’t look back.
There’s perhaps no better environment to test this idea than commercial real estate. It is a market that certainly carries more than its fair share of risk, and it is a place where the bold and the brave often come out as champions.
“What normally happens is most people are waiting on the sidelines,” Millican observes. “Someone does something and everyone says, ‘Wow, that was cheap.’ And then they ask themselves why they didn’t make the bold move.
“Once this part of the cycle starts, it tends to turn quite quickly once you hit that bottom.”
The Risk-Reward Ratio
Risk is something that can be quantified, explains Millican. In markets, the risk-reward ratio is the relationship between the money risked on an investment and the reward an investor can potentially earn on it. For many commercial real estate investors, a lower risk/return ratio is preferred since it signals less risk for an equivalent potential gain.
For instance, a 1:8 risk-reward ratio suggests that an investor is willing to risk $1 to earn $8, whereas a risk-reward ratio of 1:2 means an investor expects to risk $1 to make $3 on their investment. The ratio is calculated by dividing the amount an investor stands to lose if the property price moves in the wrong direction (the risk) by the amount of profit the investor expects to make when he sells at the price he wants (the reward).
Depending on their risk appetite, investors will have either a high or low tolerance for risk. But one thing’s for sure: Zero tolerance for risk will mean zero chance of profit.
The risk now, with interest rates high and tenancy rates lower than expected, might lead some to see a lot of uncertainty in the current climate. Yet this shouldn’t mean investors should hold cash and stay out of the markets, advises Nick Millican. In any market, no matter the phase of the market cycle, there are always opportunities.
While it’s true that there may broadly be higher risks involved in commercial real estate across the whole market, there are nonetheless less risky opportunities out there. You just need to be astute enough to find them?— and be a little bolder than usual.
Nick Millican’s Take On Risk and Reward in Today’s Real Estate Climate
Nick Millican can actually make a reasonably good case that now would be a good time to be taking a bit of risk to deliver new space for occupiers over the next few years.
While it’s true that the sentiment backdrop may be weighing against such a proposition, Millican believes that many risk-averse real estate investors are missing out on the point — and the opportunity.
“It’s become quite tricky to get investors to invest in office space in London almost regardless of the fundamentals,” he says. “But if you focus on the fundamentals, in London you see some very attractive commercial real estate propositions that are far less risky than people think. From an objective perspective, London has now become cheap enough to buy back into again after decades of high prices. I think there’s enough for sellers to reset pricing.”
But will it be the slightly bolder buyers who take advantage of these signals and the rest of the market? Well, you know how that story goes.
Nick Millican has seen more than his fair share of moments to be bold. He took the reins of London real estate firm Greycoat in 2012 as the market was still working out what to do after the global financial crisis. He steered Greycoat through the COVID-19 pandemic and out the other side. Before joining Greycoat, Millican had over a decade of experience in investment banking and real estate private equity.
At Greycoat, Nick Millican has led a firm that’s been instrumental in the development of some of Central London’s most prominent commercial buildings. Since September 2012, Greycoat has invested in and asset managed new projects with an enterprise value of over 2.0 billion pounds (approximately $2.5 billion).
“Taking educated risks is part of the DNA of being a commercial real estate professional,” says Nick Millican. “But that doesn’t mean being risky. The key is to understand how to be prudent in the risks you take.”