Understanding Investment Profiles.
If you’ve been around the Commercial Real Estate world for a while, you’ve probably picked up on hearing phrases like Core or Value-Add to describe a type of investment product. Below, we will help define what categories are used as industry standards and explain what that means in the real world. There are generally four terms used to describe investment profiles. They are Core, Core Plus, Value-Add, and Opportunistic. Each of these categories is designed to tell you the overall risk and return characteristics of an investment. Everything from a property’s physical attributes, the quality of the tenancy, and the location will dictate the category. Now what do each of these 4 profiles mean? We’ll start with Core.
Core properties are your most conservative investments that have a very low risk profile. Investors in these assets are most interested in long term, predictable cashflow – sort of like a bond. A core property will require very little asset management and gets you about as close as possible to a one hundred percent passive income. An example of this would be an industrial property with a long term NNN lease to a strong credit tenant, located in a solid sub-market. Properties that give me the strongest certainty of cashflow in a strong or weak economic cycle is the key. At the same time, there is also very little upside to the overall return.
You’ll notice that as you read through these, the level of risk will get greater and greater, but so will the potential return. Core Plus is for those investors who want a safer return but also are not afraid to take on a small amount of risk for some more up-side opportunity. Core plus property owners typically have the ability to increase cash flows through light improvements, better management or increasing the quality of tenants. At the same time, these properties still tend to be well located and well-occupied. The downside of these properties is that cash flow may be less predictable and will need active participation by ownership to fulfill their potential.
Value-add investments are where the risk of the investment becomes very apparent. The success of these investments is deeply dependent on execution by ownership with a sound strategy and daily oversight. A value-add property often has little to no cash flow at acquisition but has potential for exceptional cash flow once the value has been created by ownership. A typical profile of a Value-Add deal would be a property with occupancy issues, severe mismanagement, and/or deferred maintenance.
The final and riskiest investment type is Opportunistic. These are often very complicated projects that take the most seasoned real estate professionals to pull off a successful strategy. The risk of losing an entire investment is very clear for these projects; however, the pay-off can be enormous. Adaptive re-use, ground-up development, and vacant buildings are examples of opportunistic investments.
Well that’s it. Now you’re primed and ready to be fully engaged next time somebody starts talking commercial real estate investment strategies.
Cecil & Campbell Advisors is a commercial real estate advisory firm headquartered in Atlanta, Georgia – specializing in investments, acquisition & disposition, and tenant representation of commercial space.