Real estate risk management usually is observed only in the breach, and often too little and too late, with more smoke than light. The real estate industry, when it deigns to discuss risk, does so in a breezy, ambiguous, impressionistic and metaphorical manner that lacks operational value. Aside from the usual unsupported bromides, articles we read and real estate conference speakers we hear use terms such as “risk-adjusted” with abandon and promote so-called risk-mitigating strategies as if they are deep, self-evident propositions. They are not. In fact, it is indeed arguable these proposed risk-mitigating strategies are either value-reducing or, at best, benign, but we would not know because each article lacks an evidence-based framework for thinking rigorously about risk and how it affects value.

Most real estate portfolio managers do not focus on volatility. This is surprising because many real estate contracts contain complex options, the value of which vary dependin