Commercial real estate (CRE) investment strategies are broadly categorized into five main types: core, core plus, value-add, opportunistic, and distressed. These categories help define the risk and return profile of a specific CRE investment, which is determined by factors such as property quality, location, potential, amount of debt used, lease terms, and tenant creditworthiness.
Core Commercial Real Estate Investments
- Description: Considered the foundation of a CRE investment portfolio, core investments involve “Class A” properties in superior buildings and locations, typically diversified metropolitan areas. These properties are fully leased by high-quality tenants.
- Risk: Low
- Return: 7–10% per annum (p.a.)
- Amount of Debt: 0–30%
- Characteristics: Held for long periods, producing predictable income with little variability. Most return is generated from cash flow rather than capital appreciation.
- Current Outlook (Mid-2025): Core investments remain attractive for investors seeking stable income and capital preservation, especially in an environment where interest rates are stabilizing or beginning to decrease. While overall CRE valuations experienced a downturn from 2022 to 2024, there’s an emerging consensus that 2025 could be a “vintage year” for acquiring core assets, potentially offering value-add-like returns due to depressed pricing and a rebound in capital values. However, some traditional core assets might face refinancing challenges due to higher interest rates if their original financing was secured at lower rates.
Core-Plus Commercial Real Estate Investments
- Description: Similar to core, but properties may be in good, rather than prime, locations (“Class B”). They often require some renovation, repositioning, or re-leasing to enhance performance.
- Risk: Low–Moderate
- Return: 6–9% p.a.
- Amount of Debt: 30–55%
- Characteristics: Returns are generated from both cash flow and an increase in property value after improvements or re-letting. Cash flow can be less predictable than core.
- Example: A stable multi-family building in a metropolitan area that is currently under-managed, where improved management can boost returns.
- Current Outlook (Mid-2025): Investor appetite for core-plus strategies is increasing. These properties offer a balance of in-place cash flow with potential for minor upside through capital expenditures, lease-up, or operational improvements. This strategy is well-suited for a market in recovery where moderate improvements can yield significant gains without taking on opportunistic levels of risk.
Value-Added Commercial Real Estate Investments
- Description: Involves purchasing underperforming commercial properties with low occupancy or in need of major renovations or repositioning. The goal is often to resell for a substantial gain after adding value.
- Risk: Moderate to High
- Return: 15–20% p.a.
- Amount of Debt: 50–70%
- Characteristics: Little cash flow at the time of purchase, but potential for significant cash flow once value is added. Held for 3-10 years. Best suited for investors with strong real estate knowledge, daily oversight capability, and a strategic mindset. Returns are generated from both cash flow (post-renovation/re-letting) and increased property value.
- Example: A 1970s office building needing renovation to be repositioned as a “Class A” property with new tenants and higher leases.
- Current Outlook (Mid-2025): Value-add opportunities are particularly attractive in sectors like office, where older, outdated buildings need significant upgrades to compete with newer, amenity-rich spaces. With current market conditions leading to some distressed assets and reduced competition for acquisitions, these opportunities can allow investors to purchase properties at favorable prices and unlock substantial value through active management. Property selection based on supply-demand dynamics and strategic renovations are key.
Opportunistic Commercial Real Estate Investments
- Description: The riskiest strategy, carrying the potential for the highest returns. Often referred to as “ground-up investments,” it includes significant redevelopment, new construction, or investments in raw land or niche sectors.
- Risk: High
- Return: 20% plus p.a.
- Amount of Debt: 65% plus
- Characteristics: Often no returns for the first 3 or more years, with zero cash flow at purchase. Requires highly skilled and experienced investors.
- Example: Purchase of land and construction of a new office building or coworking space.
- Current Outlook (Mid-2025): While high risk, opportunistic investments can capitalize on market dislocations or emerging trends. For example, the booming demand for data centers presents opportunistic development potential. In distressed or recovering markets, opportunistic strategies can leverage discounted acquisitions or rising fundamentals. However, these deals are also susceptible to high construction costs and the unpredictability of lease-up.
Distressed Commercial Real Estate Investments
- Description: Investing in properties priced at a significant discount due to structural problems, management issues, or tenant problems.
- Risk: Varied (depends on the specific issues and circumstances)
- Return: Income + Asset growth (highly variable)
- Amount of Debt: 65% plus
- Example: Investing in a real estate asset at a significant discount due to its original owner declaring bankruptcy.
- Current Outlook (Mid-2025): The current market environment, with elevated interest rates and over $950 billion in CRE debt maturing in 2025, is creating a fertile ground for distressed opportunities. Properties with strong fundamentals but inefficiently structured capital stacks may come to market at attractive valuations. Investors with expertise in managing complex situations can find significant gains by turning around these assets. Record distressed-debt exchanges also signal potential opportunities for specialized investors.
Conclusion
These five categories provide a framework for investors to align their risk tolerance, time horizon, and investment objectives with appropriate CRE strategies. Core investments suit those seeking income stability and capital preservation, while value-added and opportunistic strategies appeal to investors looking for higher growth potential and are willing to take on more active management and risk. With modern fund structures making ownership more accessible, investors can now explore a diverse range of opportunities that might otherwise be out of reach. It is crucial for investors to carefully consider these designations and choose the strategy that best matches their requirements.