Value Add Commercial Real Estate Explained
Simply put, a big part of today’s real estate investment opportunities involve these value-add properties – projects that strive towards re-positioning a property to a high price point through renovation or redevelopment.
This value-add strategy in investment usually has a higher risk, but it also yields higher returns. As that’s the case, we will give you an overview of what value-add real estate is and how it works, so you’ll know whether or not it’s something that would interest you.
What Is Value-Add Commercial Real Estate?
Value-add opportunities can exist anywhere and can arise from any operational strategy that aims to increase revenue or lower operational expenses. It can also occur from a plan that seeks to reposition a property to receive a valuation gain based on an increased net operating income (NOI).
In more simple terms, value-add properties are all properties that are being altered to reach a higher value market.
In some cases, this value-add approach can even be used in purchasing poorly leased properties where the subsequent renovation or re-positioning brings the property to a more stabilized, at-market status.
Value-Add Compared to Other Approaches
Value-add is one of the four broad categories in which all private real estate investments are grouped. The three other types are:
Core – A lower-risk and lower-return strategy that uses relatively low leverage and focuses on stable, fully-leased, and multi-tenant properties located in steady, strong market areas. This approach is a sure bet and requires no renovation and thus no additional investments.
Core Plus – This strategy uses the same properties as the core strategy, but with increased opportunities for improvements through renovations and expanding the number of tenants for example. It is a moderate-risk strategy.
Opportunistic – A higher-risk and high-return approach like value-add, which uses development projects, extensive enhancements, and other re deployments.
The Risks in Value-Add Real Estate
There’s no point in discussing value-add properties without explaining the risks involved. There’s always a higher risk as this real estate always includes renovations like property enlargement, capital improvements, and structural repairs and refinishing. Value-add real estate can also include some extensive changes like major overhaul or conversion into a property for a different use.
Most of these constructions bring with them higher costs and higher risk (there’s no way of knowing what will happen to the respective market in the future once renovations complete). Additionally, when the real estate locates in secondary or even tertiary markets, the risks are even higher.
However, the potential gains are also very high. Value-add was, and still is the favored strategy for raising and deploying capital.
What Should You Do?
Ever since the Great Recession of 2008 passed, value-add strategies have become increasingly popular. Many real estate investors must create value today to gain higher returns, which prompts the higher attractiveness of value-add property.
Essentially, value-add assets can be acquired today for more attractive costs precisely because they are perceived as having a higher risk.
Ultimately, it’s up to you to see whether or not this strategy will work for you, and if you want more information or advice, you may reach us at www.cbicommercial.com
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