Reference Points

valuefunIf you really want to get me worked up, start asking me about “comps” and how important they are to the market. (For those who don’t know, in my world, “comps” refers to the basic business points of a lease deal.)

Assuming for a moment that they are accurate (which is questionable) they don’t provide any real value beyond an interesting or gossipy talking point.

A few reasons comps are barely worth the paper they’re printed on:
  1. They are trailing indicators. They don’t do anything to predict what’s going to happen with the next lease deal.
  2. Every lease is different. Each building has it’s own pro-formas and deal limits.
  3. Motivation for each landlord changes based on where they are in the ownership cycle of the building.

What comps do offer is a reference point, which is a concept I stumbled over as I read “The Undoing Project.” People look for outcomes that they consider break-even and then start measuring losses and gains. What’s interesting is people’s concern about minimizing loss rather than maximizing gain. The reason that all comps tend to be close to each other isn’t market efficiency. It’s both tenant’s and landlord’s aversion to perceived loss and lack of incentive to maximize gain.

In reality, comps just provide a data point so you don’t feel like you’re getting screwed.

We coach all of our clients to make decisions based on what your business demands, not perceived market norms. If you need to do a 1 year deal, we’ll find a way to get it done. If you need a deal with no out-of-pocket expenses, we’ll find a way to do that too. The worst case scenario is defined so pushing for more upside actually comes at very little cost.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s