In general, there are 4 commercial real estate investment strategies that developers and investors utilize when considering a real estate project.
Core investments are considered the lowest risk strategy, aiming to preserve capital and generate stable, predictable cash flows. These properties are primarily Class A buildings which possess the highest quality construction and infrastructure, are located in prime areas, and attract premium tenants enabling the property to command peak rent. Investors in core properties prefer steady cash flow over outsized returns.
Core-plus investments differ from core because they have some potential of increasing cashflows by making minor improvements to the property, management, or tenants. This also increases the risk of the investment, and the downside is that more active management is required and cash flows are less predictable. Much like core properties, core-plus properties aim to preserve capital and have a strong tenant base and are in prime locations.
Value-add investments typically involve properties that may have some cash flow, but an opportunity exists to significantly increase cash flow by enhancing the property and/or improving its operational efficiency. Common tactics include (i) making physical improvements to the property to justify higher rents, (ii) increasing efforts and a marketing budget to lease vacant space to quality tenants, (iii) investing in the infrastructure to lower operating costs (i.e. adding efficient air conditioning units), and (iv) improving the management of the property to increase tenant satisfaction and lower operating expenses. Value-add investments aim for capital appreciation and usually employ more leverage than would be found in a core or core plus opportunity.
Opportunistic investments are essentially value-add properties with even greater opportunity. Often, the property is raw land to be developed or a vacant building that requires significant renovation. Sponsors utilize a high degree of leverage and investors may not see a return on investment for many years. The risk associated with opportunistic investments is high, requiring an experienced team. But opportunistic investments aim for large capital appreciation and target high returns.