Risk analysis is critical at the peak of the cycle. The views of otherwise sophisticated investors, the so-called Serious People, are too often unexamined and almost always untested. These views constitute the Balkanization, or redlining, of property that is deemed “non-institutional.” What emerges is a cartoon approach to risk. Many pension funds are increasing their allocations to riskier opportunistic strategies because they are falling short of their yield targets. In an effort to make up for lost ground, they are ignoring an important fact: Exit cap rates can pose substantial risk to value-added and opportunistic deals and to supposed low-risk core deals, especially where the timing of the exit is critical. Today, neglecting exit cap rate risk can be irresponsible and dangerous to investors’ wealth.

As an example, a value-added, leveraged apartment deal with a waterfall and limited partner and general partner investment positions has multiple risks. Using Monte Car