TLDR: Broadly, commercial real estate investment strategies can be broken down into four categories: Core, Core Plus, Value-Add, and Opportunistic. These terms are used by commercial real estate investors as shorthand for the risk profile, quality, location and strategy of an individual property.
However, these terms are used liberally. It often seems like nobody can agree on the exact definitions or boundaries between one category and another. If you don't have time to read this full article, use the below graphic as your rule of thumb.
What is core real estate?
The term “core” refers to class A real estate located in high-quality locations with high-quality tenants that is purchased with little to no debt. Due to their relatively low risk profile, investors typically compare these types of equity investment opportunities to bond investments. Core properties typically provide 7%-10% annual returns with little variability and predictable cash flows. In addition, they tend to be resilient during economic downturns.
Core investments typically have credit tenants on a long term lease with a strong guarantor (like Starbucks or Walgreens). Multifamily core investments are located in the best parts of town. They're fully leased and need little to no work (stabilized).
Core investments, regardless of property type, should be purchased with less than 40% debt. As the name suggests, Core investments often make up the foundation of a commercial real estate investment portfolio.
What is core plus real estate?
A “Core Plus” strategy seeks real estate with high-quality tenants, in good, not great locations. Core plus properties tend to be of slightly lower quality than Core properties and are purchased more aggressively, with more debt.
Cash flow in a Core Plus property might be more variable, but it can also produce higher returns. Investors in Core Plus properties expect a 9% to 13% annualized return. An investment can be considered Core Plus with up to 60% debt.
Is value add real estate more risky than core plus real estate?
Yes. Value-Added real estate is considered to have moderate to high risk with considerable upside potential. At purchase, a Value-Add property might have low occupancy or considerable capital expense needs for physical improvements, major renovations or repositioning. However, once renovations are complete and the property is stabilized, investors enjoy returns from cash flow and price appreciation.
Value Add investors typically want to earn between 13% and 15% annual returns and may use up to 80% leverage at purchase.
How does opportunistic investing compare?
Most real estate professionals consider opportunistic investing and ground-up development as synonymous. This is the riskiest category and often presents a classic boom/bust return profile. Opportunistic properties span all asset classes including apartment buildings and office buildings.
Opportunistic investments are typically made with as much debt as a bank will allow. Investors typically want to see annualized returns greater than 20%. However, most if not all of the cash flows from an opportunistic investment will be paid after year three, which means that investors must have a high risk tolerance and be very patient.
Why should you care?
For an individual or institution looking to invest their capital in commercial real estate, these designations help set risk and return expectations. They also allow an investor to seek out a property and manager whose strategy, risk tolerance, time horizon, and investment objectives match their own.
For example, core-plus strategies tend to be a good fit with older investors or those who prioritize income stability and preservation of capital. On the other end of the return spectrum, a value-add strategy tends to be a good fit for younger investors and those who seek both cash flow and growth. So, individual investors should look to these designations for evidence that the property's strategy matches their own.