Core real estate investments refer to equity investments in high-quality, well-leased and low-leveraged commercial real estate assets like office buildings, retail centers, warehouses and multi-family properties. Core investments focus on major metropolitan markets and stable, recurring income with lower risk. This article explains the key features of core real estate, including its higher unit value, intensive management needs and illiquidity. It also covers major risk factors like excess supply, capital costs and information availability that impact real estate valuation and returns.
Core real estate has unique assets with heterogeneous features and fixed locations
No two real estate properties are identical due to factors like land, building, location, use, size, age and quality. Even buildings with the same tenants and leases can be situated at different locations. This uniqueness and fixed location of each property differentiates real estate from stocks and bonds that have standardized and interchangeable units.
High per-unit value of private real estate limits number of investors
A single private real estate asset has a much higher unit value than bonds or stocks, often limiting the number of potential investors and making diversification difficult. Securitization through publicly-traded vehicles like REITs helps overcome this by allowing partial ownership of indivisible assets.
Real estate needs active management for operations like maintenance and leasing
Unlike bond or stock investors, equity real estate investors have responsibility for managing the property, including maintenance, lease negotiations and rent collection. This hands-on oversight has additional costs that must be considered in return projections, whether conducted by the owner or a hired property manager.
Real estate transactions have high costs for services like brokers, appraisers and lawyers
Buying and selling real estate is expensive and time-consuming due to the many professionals that may be involved before a transaction closes, like brokers, appraisers, attorneys, lenders and building inspectors. These factors contribute to real estate’s relative illiquidity.
Shift in capital availability significantly impacts real estate valuations and investor demand
The appetite for real estate investment depends heavily on the cost and availability of debt capital relative to expected returns on alternates like stocks and bonds. Tight credit and high interest rates can greatly dampen demand and prices for real estate, while easy money can do the opposite. These capital market forces can cause property values to rise or fall independently of changes in tenant demand.
Core real estate investments have unique assets, high per-unit value, intensive management needs, illiquidity and valuation subject to capital availability. Risk factors like excess supply and constrained information challenge income and appreciation projections.