What are the four main investment strategies in commercial real estate?

There are four main investment strategies when evaluating commercial real estate which include Core, Core+, Value-Add and Opportunistic. When discussing real estate investments I may occasionally reference these strategies as the “Core Four”. These terms are used in to describe different real estate investment strategies based upon the risk and return profile of the investment.

Four Main Investment Strategies

Core: Core investments are the least risky of the Core Four. These investments typically involve properties that are already built, fully leased, and generating steady income. The main objective of core investments is to provide stable and predictable income streams with minimal risk. Core properties are often located in prime locations with high demand and stable occupancy rates.
Core+: Core Plus investments are slightly riskier than core investments. These properties may have minor management or physical issues that can be improved to increase cash flow and value. Core Plus investments can provide slightly higher returns than core investments due to their potential for value enhancement.
Value-Add: Value-Add investments involve buying a property that is in need of renovation, repositioning, or restructuring to increase its value. These investments carry more risk than Core or Core Plus investments but offer higher returns. Value-Add investments may require additional capital to make improvements, and investors must have a clear plan to increase the property’s value to be successful.
Opportunistic: Opportunistic investments are the riskiest of the Core Four strategies. These investments involve properties that require major repositioning or development to create value. The properties may be in poor condition or may require significant capital investments to generate income. However, successful Opportunistic investments offer the highest potential returns.

Core Investment Strategies

A Core Investment in commercial real estate is a low-risk, low-return investment strategy. The investor seeks to acquire a stable, income-generating property that requires minimal or no improvements. These properties may be fully leased to credit-worthy tenants and located in prime locations, providing consistent cash flow and long-term appreciation.

The Core Investments Pros:

Stable and Predictable Income: Core investments provide stable and predictable income through long-term leases to credit-worthy tenants.
Lower Risk: They are lower-risk investments due to the stable cash flow and low dependence on market conditions.
Low Capital Expenditures: Core investments require minimal or no capital expenditures, which reduce the initial investment and increase the investor’s overall returns.
Liquidity: Typically, core investments are more liquid than other commercial real estate investments, allowing investors to easily enter and exit the investment.

The Core Investments Cons:

Limited Upside Potential: Core Investments have limited potential for significant value enhancement compared to value-add or opportunistic investments.
Lower Returns: They may offer lower returns than other commercial real estate investments due to the low risk profile.
Market Risk: Core Investments are still subject to market risk, as the success of the investment is still dependent on market conditions.
Limited Diversification: They may not provide much diversification to an investor’s portfolio, as these investments are typically located in prime locations and focused on one property type.

Core investments can provide a stable and predictable income stream for private real estate investors seeking low-risk investments with consistent long-term appreciation. However, investors should carefully consider their investment goals and risk tolerance before investing. Investors should be aware of the limited upside potential and lower returns compared to other commercial real estate investments.

Core+ Investment Strategies

Core Plus, commonly known as “Core+”, investment strategy is a moderate-risk, moderate-return investment strategy. The investor seeks to acquire a property that requires some improvements, but with less risk than a value-add or opportunistic investment. The properties may be fully leased and generating stable cash flow, but could benefit from additional capital expenditures to enhance the property’s income-generating potential.

The Core Plus Pros:

Moderately High Returns: Core Plus investments offer the potential for higher returns than core investments due to the value-add component, but with less risk than value-add or opportunistic investments.
Reduced Risk: Core+ investments are less risky than value-add or opportunistic investments since they involve less capital expenditures and have less dependence on market conditions.
Stability: The property may be fully leased and generating stable cash flow, providing the investor with consistent and predictable income
Diversification: These investments can provide diversification to an investor’s portfolio by investing in different types of properties or in different geographical locations.

The Core+ Cons:

Limited Upside Potential: Core+ investments have less potential for significant value enhancement compared to value-add or opportunistic investments.
Longer Holding Period: They may require a longer holding period than core investments as additional capital expenditures and redevelopment may take time.
Capital Expenditures: Core Plus investments require additional capital expenditures, which can increase the initial investment and potentially reduce the investor’s overall returns.
Market Risk: These investments are still subject to market risk, as the success of the investment is still dependent on market conditions.

These Core+ investments can offer a balanced risk and return profile. Some investors seeking moderately high returns with less risk than value-add or opportunistic will choose this investment strategy. However, investors should still conduct thorough due diligence and consider the investment’s potential downside risks before investing.

Value Add Investment Strategies

Value-Add investment is a strategy in commercial real estate where an investor purchases a property that has the potential to increase its value through renovation, repositioning, or other improvements. The goal is to improve the property’s income-generating capabilities and increase its overall value, resulting in higher returns for the investor.

The Value-Add Pros:

Potential for High Returns: Value-Add investments offer the potential for higher returns than core or core plus investments because the investor is able to increase the property’s value and cash flow.
Control: As the owner of the property, the investor has control over the property’s management, leasing, and capital expenditures, allowing for greater control over the investment’s performance
Diversification: Value add investments can provide diversification to an investor’s portfolio by investing in different types of properties or in different geographical locations.

The Value-Add Cons:

Higher Risk: Value-Add investments are riskier than core or core plus investments because they involve additional capital expenditures and renovation, repositioning, or restructuring to increase the property’s value.
Longer Holding Period: Value-Add investments often require a longer holding period before the investor can realize the increased value and higher returns.
Capital Expenditures: These investments require additional capital expenditures, which can increase the initial investment and potentially reduce the investor’s overall returns.
Market Risk: The success of a value add investment is heavily dependent on the overall market conditions, such as supply and demand, interest rates, and economic growth, which can impact the property’s value and cash flow.

Value-Add investments can be a lucrative investment strategy for private real estate investors. Investors need to understand that these increased returns also carries more risk and requires careful evaluation and planning. Investors should consider their risk tolerance, investment goals, and experience before investing in a value-add investment strategy.

Opportunistic

An opportunistic Investment in commercial real estate is a high-risk, high-reward investment strategy. The investor seeks to acquire a property that requires significant improvements or redevelopment to generate higher returns. The properties may have been underutilized, poorly managed, or in distressed financial conditions.

The opportunistic Pros:

High Potential Returns: The primary benefit of Opportunistic Investments is the potential for high returns. These investments can offer the highest returns in commercial real estate due to the significant value enhancement that can be achieved by making improvements to the property.
Control: As the owner of the property, the investor has control over the property’s management, leasing, and capital expenditures, allowing for greater control over the investment’s performance
Diversification: Opportunistic investments can provide diversification to an investor’s portfolio by investing in different types of properties or in different geographical locations.

The opportunistic Cons:

High Risk: Opportunistic Investments are the riskiest of all real estate investment strategies, as they involve significant capital expenditures, redevelopment, and repositioning of the property. The success of the investment depends heavily on market conditions, which are beyond the investor’s control.
Longer Holding Period: These properties often require a long holding period before the investor can realize returns. The property may take time to reposition, and it may take longer to find the right buyer or tenant to realize the investment’s full potential.
Capital Expenditures: Opportunistic investments require significant capital expenditures, which can increase the initial investment and potentially reduce the investor’s overall returns.
Limited Exit Strategies: These investments may have limited exit strategies. They may not be as liquid as other commercial real estate investments, and the investor may face challenges when trying to sell the property.

Opportunistic Investments offer high potential returns but also carry high risk. Investors should consider their risk tolerance, investment goals, and experience before embarking on an Opportunistic Investment strategy. Additionally, it is essential to conduct thorough due diligence and have a clear exit strategy before investing.

Tri-Land Properties is a commercial real estate developer that focuses on grocery-anchored real estate investment strategies. We have been producing risk-adjusted returns for passive investors since 1978. By investing with Tri-Land, an accredited investor can have access to institutional grade grocery anchored real estate investments. To learn more, please contact RJ Johnson at Tri-Land Properties.

What are the four main investment strategies in commercial real estate?