As I mentioned in an earlier post, there are lots of terms used by commercial real estate investors that often confuse or intimidate novice investors. I promised to define some of these terms in occasional blog posts. Well today is your lucky day, because I decided to define four related terms: Core, Core Plus, Value Add, and Opportunistic. These are the four investment strategies, and most commercial real estate investors will focus one or two of these strategies when investing.
Core:These are fully stabilized properties with credit quality tenants on long term leases. These investments are well located in primary and secondary markets. Usually these properties are purchased by institutional investors that are looking for a a safe reliable return. Core investments in commercial real estate are often purchased as a way to diversify an investment portfolio.
Core Plus: Investors who generally want a safe return, but are looking for a little bit of upside prefer Core Plus. These properties are match the physical description of Core investments, but usually have some opportunity to increase NOI. A common Core Plus investment would be a class A office building in a CBD in a primary market. The property would have good tenants, but might have a lot of upcoming lease roll. Core investors would see this lease roll as a threat to their reliable income, but Core Plus investors might see this as an opportunity to increase rents.
Value Add:This strategy is exactly what it sounds like. Value Add investors are looking for the opportunity to increase the value of their commercial real estate investments. Often these properties will have a high vacancy rate or some physical obsolescence. Value Add investors will buy these properties at a discount, and work to increase the occupancy or fix the physical deficiencies. Once the property has been stabilized, these properties may be sold to Core investors.
Opportunistic: There are a lot of different types of investments that fall into this category, from ground up development, to adaptive re-use, to emerging markets. The unifying principle is that the investor is willing to take entrepreneurial risk to achieve out-sized returns.
These are not strict definitions, just broad guidlines. When I'm helping investors in Reading, PA, I always like to start off by asking which investment strategy they prefer. Feel free to comment below and let me know which investment strategy you prefer.