Each of the above terms are used to define (on a spectrum) the risk, return, debt, age, location, and other physical attributes of a commercial real estate investment. The categories are somewhat generalized, so not every investment fits neatly into any one particular category and there may be some crossover. At Lorimont, we believe there is a real estate investment strategy for nearly every investor, and finding the right investment for each investor's own risk profile is key.
Core investments are the most conservative investments of the group, akin to a stock/bond investor seeking income rather than price appreciation/growth. These investments are as passive as possible, and they are typically purchases of newer buildings in desirable locations with long term NNN or absolute net leases, occupied by corporate credit tenants (those with a credit rating of Baa3 or higher by Moody's or BBB- or higher by Standard & Poor's or Fitch). As such, they have stable and consistent cash flow, low risk, and require very little asset management. In exchange for a more passive investment, the investor's expected IRR is on the lower end of the spectrum, typically 5-9%. These investments are often financed with less than 50% debt capital, as more debt means more risk.
Core Plus investments have low to moderate risk, akin to the stock investor seeking both income and growth. Core Plus properties are still high quality, high occupancy properties, but slightly older and/or in an inferior location compared to Core properties. Core Plus investors may have the opportunity to increase cash flows by being more hands on asset managers, improving tenants, or investing in deferred maintenance items. In exchange for their increased efforts and risk, Core Plus investors typically see a slightly higher IRR in the 8-10% range. Core Plus investors also generally finance a larger portion of the transaction, but not usually more than 60%.
Value-add investments have moderate to high risk, akin to investors seeking growth stocks. Value-add properties often have some cash flow at the time of purchase, but have the potential to generate substantially more income once the investor adds value through improvements, investment in deferred maintenance, improved leasing efforts, and hands-on property management. Value-add investors seek higher returns for their increasingly hands-on efforts, generally above 10%, and generally they finance above 60% but below 80% of the purchase.
Opportunistic investments are the riskiest of the group, and like value-add investments, they are also akin to stock investors seeking growth stocks, except in risky, unproven companies with high upside. As the name suggests, opportunistic properties tend to be speculative investments in ground up developments, habitually vacant properties, or properties that need significant rehabilitation. As such, experience and/or a well-organized business plan is necessary for these properties to realize their potential. If successful, these types of investments will yield the biggest returns, but they also bear the most risk, as it may be several years before the project is complete, fully leased, and producing consistent cash flow. These properties are also typically highly leveraged, often above 80%, meaning one misstep or a changing economy/market could derail the project.