As soon as you dive into our online prospecting tool, you’ll quickly learn that there are many types of commercial real estate properties. In a separate post, we covered the eight types of commercial buildings and three classes of commercial properties. We want to take a slightly different look at the types of CRE in this post; this time, we’re looking at CRE as investment types.
These four types of CRE investments are not defined by their size, type, location, or purpose. Instead, they are defined by their levels of risk and capital investment requirements to achieve profitability. Risk in investments refers to the predictability of earning income from your investment. With a low-risk investment, it is very easy to predict how much income you’ll earn.
What Are Core Real Estate Investments?
Core commercial real estate investments carry little risk, little hands-on asset management, require little to no capital investment, and tend to have little turnover in terms of tenants. In short, core CRE is viewed as stable. An example of a core CRE property would be a free-standing drug store like Walgreens, CVS, or RiteAid with a 30-year lease. They are viewed as very stable. According to Origin Investments, core CRE investors earn 7% to 10% annually.
Key characteristics: low-risk, stable, high quality
Average expected earnings: 7% to 10% annually
Typical investment strategy: Buy and hold
Examples: Class A multifamily apartment buildings, high-rise office buildings, and high-end or luxury retail centers
What are Core Plus Real Estate Investments?
Core plus CRE has slightly more risk than core CRE. They are considered to have low to moderate risk profiles and tend to be high-quality properties, such as well-occupied apartment complexes in popular neighborhoods (Origin). Because the buildings are a little older, they might require more capital improvements to update or add amenities to attract tenants.
Key characteristics: High quality, low to moderate risk
Average expected earnings: 8% to 10% annually
Typical investment strategy: Growth and income
Examples: Class B apartment buildings, active retail centers (not high-end and not abandoned)
What About Value-Add CRE Investments?
As the name suggests, value-add properties need some work, but they’re still potentially good investments. They may not be generating a lot of cash flow at the moment, but with some upgrades and updates — value-added — they can. These types of investments can generate 11% to 15%, according to Origin Investments.
Key characteristics: Low occupancy, moderate to high risk
Average expected earnings: 11% to 15% annually (but it can take 5 to 7 years to appreciate the return)
Typical investment strategy: Growth
Examples: Aged apartment buildings in need of updates and repairs, low-occupancy retail centers, office buildings in need of repair and upgrades
What Are Opportunistic CRE Investments?
The opportunistic commercial real estate property is the riskiest of all because it requires the most investment and takes the longest. For example, undeveloped land, empty buildings, and repositioned manufacturing facilities are examples of opportunistic properties. These types of investments include CRE developments that start from the ground up, as well as tear-downs and complete renovations.
Key characteristics: Very high risk, zero occupancy
Average expected earnings: Can be as much as 20% annually (Origin)
Typical investment strategy: Growth, high growth
Examples: Vacant lots, abandoned manufacturing