If you were to choose the most important objective of any industrial real estate transaction, what would it be? Spectacular savings compared to market? Getting acceptance on all the important legal terms? Above market tenant improvement allowance? Operations is happy with the property condition? On-time occupancy?
While all those results would be fantastic and are certainly worthy objectives, they are not the most important objective of any industrial real estate transaction. The most important objective is to avoid negative outcomes. Why?
Because deep down in our collective psyche, avoiding negative outcomes is what people, and thus organizations, care about the most. We care about winning, but not as much as avoiding losing. In real estate terms, we care about positive results such as beating the market on pricing, but not in exchange for terms which increase risk.
This is the essence of our negativity bias and its impact on industrial real estate transactions. A negativity bias or negativity effect is when, all else being equal, things of a negative nature have a stronger impact on us than things of a neutral or positive nature. In fact, experts say that it can take five positive events to outweigh a negative one. In industrial real estate transactions, this ratio is probably understating the impact of certain negative events on what the firm would consider a successful project.
Since industrial real estate’s value to the industrial firm is largely its utility, the greatest risks lie in the inability to secure and utilize such assets while it is owned or leased. Therefore, we should focus our efforts to reduce the possibility of negative outcomes within the transaction process, both for the risk to utility but also because the industrial firm will most likely judge project success on the lack of negative results.
In other words, we should employ risk mitigation strategies to the extent they are reasonable and possible. Risk mitigation strategies are processes whereby risks are identified, prioritized, and reduced. In industrial real estate transactions, such processes should be defined and a part of the real estate organizations best practices or playbook.