C
ommercial real estate investors create customized portfolios using various investment strategies, each with unique risk and return profiles. Kaj Lea, Head of the Pacific Northwest and Central Region for Commercial Term Lending at Chase, outlines five common strategies: core investments, core-plus investments, value-add investments, opportunistic investments, and real estate investment trusts (REITs) and private equity funds.

    A sample portfolio with $100 million in total investment capital over a 10-year horizon aims to balance stable income from core and core-plus investments with capital appreciation from value-add and opportunistic investments. The investor seeks moderate risk tolerance and a mix of stability and growth potential.

    The portfolio allocation is:

    * Core investments: 40%

    * Core-plus investments: 25%

    * Value-add investments: 20%

    * Opportportunistic investments: 10%

    * REITs and private equity funds: 5%

    Core investments typically involve high-quality, well-located properties with stable long-term renters. They require minimal management and capital improvements, providing steady cash flows with limited risk exposure. However, they also come with lower returns and higher competition.

    Examples of core investments include:

    * A fully leased industrial building with long-term credit renters

    * A new multifamily property in a desirable location

    Core-plus properties are more management-intensive and slightly more susceptible to market changes. They may involve minor building improvements or elevated risk due to shorter lease terms and deferred maintenance. These investments offer stability and potential for higher returns and property value increases.

    Examples of core-plus investments include:

    * A well-maintained apartment complex with minor deferred maintenance

    * A high-quality mixed-use property in a secondary market

    Value-add properties require significant upfront costs for repairs and updates, but can lead to increased property values and returns. They often involve renovations or operational enhancements and have higher vacancy rates.

    Examples of value-add investments include:

    * A multifamily property that needs substantial renovations to drive rent growth

    * An industrial warehouse with lower clear heights but near a final shipping destination

    Opportunistic investments are typically development projects or distressed assets in high-growth areas. They require extensive expertise, active management, and can be susceptible to market volatility.

    Examples of opportunistic investments include:

    * A ground-up development of a mixed-use property in an emerging tech hub

    * Acquisition and turnaround of a distressed hotel property

    REITs provide liquidity, diversification, and regular income without the hassle of property management. Private equity real estate funds pool capital from multiple investors to invest in value-add or opportunistic projects.

    Examples of REIT and private equity fund investments include:

    * Shares in a publicly traded REIT specializing in industrial properties

    * Participation in a private equity fund focused on value-add multifamily properties

    By combining these investment strategies, commercial real estate investors can meet their long-term goals.