Forecasting for real estate investors: 10 ways to get it less wrong

Forecasting is difficult. The confidence with which the real estate industry presents its most recent forecast isn’t justified by a close examination of historical success in making predictions.

Studies have shown that forecasters have not had great success in estimating real estate outcomes. Generally, the industry’s track record is better for rental growth than yield movement. But just like forecasters of the economy more generally, the track record is not good.

That should not dissuade us from getting better, however.

After all, we have no choice but to develop a view of the future to inform investment decisions. Every investment embeds a forecast of some kind.

One of the key insights of Philip Tetlock, author of “Superforecasting,” is that the best forecasters believe they can improve. He says, “Foresight isn’t a mysterious gift bestowed at birth. It is the product of particular ways of thinking, of gathering information, of updating beliefs.”

So, how can you and your organization develop better views of the future? Here are 10 suggestions:

1. Make forecasting a team activity. Constructed appropriately, teams can be more effective forecasters than individuals. Ensure participants bring diverse perspectives, share openly, and offer constructive criticism to one another. Healthy disagreement and contest beat consensus and compromise.

2. Start with the outside view. The single biggest forecasting mistake is ignoring what typically happens in similar situations. Your investment opportunity is probably more normal than you think. Start by asking what has happened previously in comparable scenarios. As Daniel Kahneman says, “If the reference class is properly chosen, the outside view will give an indication of where the ballpark is.”

Once you have established the range of likely outcomes suggested by base rates, combine this with the specific information about your investment opportunity. Studies have shown that starting with the “outside view” and then adding an “inside view” results in better predictions.

Statistical models used for market forecasts embed an outside view to some extent, as they are built on historical data. But real estate professionals are often less disciplined when it comes to asset-level assumptions, such as estimating the impact of capital expenditures on rents or forecasting lease-up periods. These are areas where base rates deserve more attention.

3. Draw from multiple perspectives. Some forecasters rely on a single grand theory or one deep vein of expertise – a dominant framework they apply to every situation. Those who view the world through a single lens are particularly vulnerable to blind spots. As Nassim Taleb put it, “The problem with experts is that they do not know what they do not know.”

Better forecasters draw eclectically from multiple sources, deploy multiple frameworks, are comfortable holding contradictory ideas, and adapt their thinking as events unfold. In real estate, those with a good understanding of multiple cycles across several markets are likely to be more accurate than those with deep knowledge of a single cycle in one specific market.

4. Deliberately practice intellectual humility. The best forecasters are their own toughest critics. As Nate Silver has said, “The more humility we have about our ability to make predictions, the more successful we can be in planning for the future.” Overconfidence is a primary reason forecasts fail. People often mistake confident predictions for accurate ones, but confidence and accuracy are frequently inversely correlated.

5. Keep models simple. It is tempting to build models that perfectly explain historical data. But the more precisely a model fits the past, the less likely it is to accurately predict the future. This problem, known as overfitting, means the model captures noise rather than signal.

The best forecasting models are often simpler than analysts assume. They identify core drivers and accept unexplained variance rather than constructing elaborate explanations that won’t generalize.

6. Be accurate rather than conservative. Real estate is a cyclical asset class; your forecasts should reflect that. Forecasts of rental and capital growth tend to be much less volatile than actual outcomes. It is difficult to identify future inflection points, but if you are expecting an upswing or downswing, ensure the magnitude of movement is consistent with historical precedent.

7. Fight the tendency to match the consensus. Do your own work and say what you think. Historically, both economic and real estate forecasts have tended to cluster together. Your forecast is not more likely to be correct simply because it resembles the consensus.

8. Don’t rely on point forecasts. Build in forecast error explicitly. Consider a broad range of outcomes. Run multiple scenarios. This will highlight which assumptions most impact your forecast. Such an approach counters overconfidence and overprecision.

9. Don’t be afraid to change your forecast. There is a common misperception that good predictions should not change. On the contrary, the best forecasts evolve as new information emerges. Let go of previous predictions. Don’t let your ego get in the way. Good forecasts are focused on accuracy, not narrative coherence.

As Henry George put it, “A sailor who sets the same sail all the time without making changes when the wind changes will never reach his harbour.” Frequent updates compound into superior accuracy.

10. Be accountable. Keep notes on the predictions you make and the reasoning behind them. Review them regularly and look for lessons learned. If you can’t learn, you can’t get better. Critically assess whether the process can be improved.

Ultimately, what matters isn’t just the forecast numbers themselves. It is the quality of your communication of those forecasts, the ability to recognize their strategic implications, and the actions taken as a result. Numbers alone don’t say much. A well-communicated forecast that drives timely decisions will always outperform a precise prediction that fails to inspire action.

A version of this article originally appeared in The Property Chronicle. To read other articles I have written for The Property Chronicle, please click here.