The core plus investment strategy has become increasingly popular among real estate investors in recent years. This strategy sits between the low-risk, stable-return core strategy and high-risk, high-return value-added strategy. Investors using a core plus strategy can benefit from the stable cash flows of core properties while also seeking moderate value creation through light property upgrades. Compared to core properties, core plus assets may have slightly lower occupancy rates or require minor renovations. However, core plus still focuses on fully-leased, quality assets in strong locations. The increased flexibility of core plus leads to moderately higher returns than a pure core approach. At the same time, core plus entails less risk than value-added because it does not require major repositioning or redevelopment. When implemented successfully, a core plus real estate investment strategy can produce attractive risk-adjusted returns for investors. This article will examine the key characteristics, implementation, and risks involved with a core plus approach.
The positioning of core plus between core and value-added strategies
The core plus investment strategy sits between the core and value-added approaches in terms of risk and return. Core real estate investments target stable, fully leased assets with little debt. These properties generate reliable cash flows for investors but minimal upside through appreciation. On the other end of the spectrum, value-added strategies acquire distressed or underperforming assets in need of extensive rehabilitation. While repositioning properties offers high return potential, it also involves significant risks. The core plus approach strikes a balance as a moderately aggressive strategy. Investors enhance core assets through light renovations, lease-up of vacant space, or modest repositioning. These improvements provide the opportunity to increase net operating income and property values. However, core plus limits risk by focusing on institutional-quality assets in prime locations that do not require heavy lifting. While core plus properties may have minor issues, they are not complete rehab projects like in value-added strategies.
Real estate sectors suitable for a core plus approach
Core plus strategies work well across the major real estate sectors, including office, industrial, multifamily, and retail. Investors target fundamentally sound assets that offer light value-add potential. For example, a Class B suburban office building with high occupancy but outdated interiors and amenities is a classic core plus candidate. Upgrading lobbies, corridors, and restrooms can make the building competitive with newer Class A properties. Within industrial, a core plus investment may focus on an older warehouse facility in a supply-constrained location. By renovating and modernizing the warehouse, an investor can achieve higher rental rates. Core plus is also popular in multifamily housing. Acquiring a stabilized rental community and renovating apartment interiors can command higher rents to enhance returns. Finally, neighborhood and community shopping centers tend to work well for core plus. Strategic tenant repositioning and facelifts to the retail center can boost foot traffic and sales.
Implementation of a core plus investment strategy
When implementing a core plus approach, investors should follow clear strategies to upgrade properties and create value: – Focus on enhancing cash flow, not achieving high appreciation. Look for ways to increase in-place rents through renovations and active management. – Improve competitive positioning through exterior and interior upgrades. For example, refreshing apartment units, modernizing retail facades, upgrading lobbies and corridors. – Lease-up vacant space that may exist at acquisition. Reduce downtime between tenants by quickly renovating and re-leasing vacant units or floors. – Make strategic tenant improvements to reposition assets. For a retail center, replace weaker tenants with stronger, higher credit ones. – Add amenities to properties to meet tenant demands. Examples include fitness centers, conference facilities, golf simulators, pet care, and electric vehicle charging stations. – Implement low-cost “green” improvements to reduce operating expenses. Examples are LED lighting, water efficiency upgrades, HVAC optimizations, and roof improvements.
Risks associated with a core plus investment strategy
While a core plus approach moderates risk versus higher-returning strategies, investors should still be aware of the potential downsides: – Estimate costs and timelines conservatively. Unanticipated delays or cost overruns can quickly reduce projected returns. Thorough underwriting is key. – Target quality assets. Choosing poorer quality properties with significant issues adds risk. Focus on fundamentally sound assets. – Limit use of leverage. Higher leverage amplifies risk. Maintain reasonable loan-to-value ratios. – Manage tenant rollover and lease-up carefully. Losing major tenants during renovation can jeopardize returns. Proactively address lease expirations. – Develop clear exit strategies. Unexpectedly long hold periods can reduce returns. Know how and when you plan to sell the asset. – Assess future supply impacts. New competitive properties on the horizon could make upgrades less viable long-term.
In summary, the core plus real estate investment strategy offers investors a middle ground between stable core and high-risk value added approaches. By targeting fundamentally sound properties and making modest upgrades, core plus can provide moderate cash flow growth and appreciation. However, conservative underwriting is essential to avoid cost overruns. When executed properly, core plus can produce solid risk-adjusted returns for patient investors.