Commercial real estate (CRE) can appeal to different risk-return profiles

Key takeaways

  • CRE can be classified into four categories: core, core plus, value-add, and opportunistic, based on property location, property conditions, management effectiveness, and tenants’ quality.
  • Investors can choose core properties that tend to have a lower risk-return profile, the more substantial opportunities for price appreciation offered by opportunistic ones, or a mix of income and growth from core plus or value-add properties.
  • Yieldstreet’s investors have the opportunity to allocate to a wide range of real estate offerings.
Photo by iStrfry , Marcus on Unsplash

Commercial real estate – which can include buildings, office towers, shopping centers, industrial parks, and student or senior housing – offers a broad array of opportunities for investors with different risk-return profiles, from high-quality, more expensive properties with lower  volatility in their resale value, to riskier properties whose price may potentially appreciate significantly if additional money is spent to upgrade them. The industry classifies these investments into four categories: core, core plus, value-add and opportunistic based on property location, property conditions, management effectiveness, and tenants quality.  

Core

Core properties are high-quality buildings in highly desirable locations. Exclusive multi-family rental buildings or downtown office towers in major cities like New York, Chicago or San Francisco would qualify as core commercial real estate holdings. 

These properties tend to generate more steady returns, mostly in the form of high rents from tenants who have a history of dependability. For buildings rented to businesses, the income may be locked in for five years or more through long-term leases.

These buildings are in very good condition and are unlikely to require additional investment to ensure they meet tenant needs. The properties tend to have good management that has already maximized returns and minimized costs, with tenants likely to be satisfied with the quality of service. The value of these properties tends to remain stable – at the top of the market – so they may not offer a significant appreciation opportunity at resale. On the flip side, purchasers can usually be confident that the value of the property won’t decline significantly as long as the broad real estate market remains healthy. The asset is likely to be highly liquid because owners are often expected to find buyers. Given that, core properties are generally considered the least risky of these four categories.

Core plus

These are good properties that may still qualify as up-and-comers, with the potential to  deliver steady income, but also to offer some opportunities for price appreciation.  It may be that the property is in good condition, but could benefit from some improvements or updates that would make it even more desirable to high-quality tenants. A new management team, or an existing one with some additional guidance from new investors, may be able to find ways to run the property more efficiently and generate additional returns. In terms of location, these properties may not be in an area or a city that has a longstanding history of being highly desired, and instead is in an up and coming location that is  suddenly experiencing an influx of new residents and businesses. A positive market juncture may create the conditions for the property to appreciate and generate  gains for investors if and when it is sold.

Core plus properties tend to have a higher risk-return profile, but they are also attractive as their entry point can be more accessible.  

Value-add

These properties can be more dated, or have simply never been managed well enough to realize their full potential. Investors in value-add properties may  need to substantially upgrade the property and – perhaps – install new management that can run it more efficiently. In terms of location, these properties may be in an area of town or a city that is undergoing a transition and is projected to become a desired location. 

Investors in these properties must be comfortable with a higher risk-return profile compared to core or core+ investors, as they would be counting on additional appeal generated by their updates – which is a cost – as well as potential market-wide shifts that make the location more attractive to tenants.  

Opportunistic

These are properties in need of a full turnaround. They may be in a desired location but have fallen out-of-date or poorly managed, perhaps both. They  may be in an area that has upside potential, but that is at the inception of its transformation, with higher-paying tenants still reluctant to make the first move. Investors in these buildings are unlikely to be looking for  current income, rather to upgrade the property or find ways to manage it better so that it can generate higher returns at a later stage.

Opportunistic commercial real estate has the highest risk-return profile among the four categories. Investments made to upgrade the property may not be able to enhance its value enough to generate a price gain that investors will consider enough to offset the risk, or the longer time horizon for the investment’s realization.

Yieldstreet offers access to all real estate investment strategies so investors can build out a well rounded portfolio. Currently we have real estate offerings available that span all categories, with a large focus on the core plus and value add segments and geographically concentrated in the southern states of the US, where economic and demographic fundamentals remain strong

See how past and present opportunities fit within each category below:

Bold: Open offerings | Normal: Past offerings 

Head to the marketplace to review our available CRE offerings and to learn more about where they fit on the risk/return spectrum.

Learn more about the ways Yieldstreet can help diversify and grow your portfolio.

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