4 Investment Strategies For CRE

No two investors are alike, and fortunately, commercial real estate (“CRE”) investing offers opportunities to investors of all risk tolerances across various facets, including asset segment, property location and condition, price, and investment strategy.

One of the essential elements to CRE investing is the investment strategy an investor wishes to pursue based on a range of risk-return profiles.

The major considerations that determine the investment risk associated with a CRE property include physical condition and attributes of the property, tenant profile, and amount of debt used to capitalize a project.

Physical attributes associated with a property include?the tenant profile (creditworthiness, income, etc.) , length and term of the in-place leases, and the location and physical condition of the asset.

The amount of debt incurred in connection with the acquisition of a property is also crucial since it impacts the risk profile of an investment. Investors often deem highly leveraged assets as more high risk than fully paid assets.

Categorized by their risk-return profiles, here are the four major investment strategies:

CORE

Core investments are considered the?lowest risk. Not only do properties that fit in this category offer lower risk, but they also?provide more stable returns?- albeit generally lower than other investment types. This strategy is ideal for the conservative investor willing to sacrifice returns in favor of security.

Core investment properties boast high occupancy (typically 90% or higher), stable, reliable income, and established, high-quality tenants capable of completing long-term leases. These properties are typically located in primary markets with strong fundamentals requiring little to no upgrades.

CORE-PLUS

Core-Plus investments are characterized by?low to moderate risk. Unlike Core investments, where?most of the return is derived from income, with Core-Plus investments,?a higher proportion of an asset’s expected return will be derived from appreciation due to opportunities for property improvements. Core Plus investments can yield returns between 9% and 13% annually.

Properties falling under Core-Plus investments tend to be high-quality and have a low vacancy but offer the opportunities to improve income through slight improvements - whether to the property itself, the management, or the tenant profile.

Whereas Core investments feature long-term, established tenants, Core Plus investments feature less predictable tenants that may require more active management by ownership to maximize performance.

VALUE-ADD

Value-Add investments are considered?moderate to high risk. Total expected returns are derived from income and appreciation, with expected annual returns ranging between 13% and 18%.

At the time of acquisition, Value-Add properties?typically underperform in cash flow and occupancy areas and hold out hope for significant improvements in occupancy and rents?and, as a result, income, through moderate to substantial improvements to the property or management efficiencies.

At the time of acquisition, most Value-Add properties underperform due to one or more problems, including occupancy issues, management problems, infrastructure and maintenance problems, or a combination thereof.

Investors who target Value-Add opportunities see an opportunity for significant improvements in income and appreciation by leveraging their knowledge, experience, and expertise to make the necessary improvements for improving occupancy and decreasing expenses - all with the result of improved returns.

OPPORTUNISTIC

On the other end of the risk scale from Core, investments are the Opportunistic investments considered?high-risk. However, hand in hand with this high-risk is the opportunity for outsized returns - with average annual returns of 20% a possibility.

Opportunistic investments aren’t easy money. They?require the most work as well as the most patience. These investments involve the most complicated projects like ground-up developments, land development, or repositioning a building from one use to another.

Opportunistic investments can involve entitlement matters and zoning and rezoning issues that can last years, not months. As a result, investors may not see a return on their investment for three or more years.

Commercial real estate investing can be a valuable addition to any portfolio, and it doesn’t require that investors conform to an established profile or stereotype.

The beauty of CRE investing is that there is an?opportunity for every investor, no matter their risk tolerance, capital capabilities, or timeframe. The opportunities are there for the taking. Investors have to be willing to seize them.