As an experienced commercial real estate entrepreneur, I advocate that CRE provides unique advantages for potential investors…
Core Investing
Core properties provide stable, recurring income streams with lower relative risk profiles. As such, they require less intensive management and are often favored by conservative investors…
Tenant Profile
The ideal core asset will have credit tenants with investment grade ratings. Such tenants may include large corporations, government agencies, hospitals, grocery stores, pharmacy chains, and banks. These tenants sign long 10+ year leases and possess the financial strength to fulfill lease obligations without default…
Key Metrics to Analyze
When evaluating a core commercial property, investors should analyze metrics including capitalization rate, net operating income stability, occupancy costs, tenant retention rates, and debt service coverage ratios. Additionally, macro location factors such as market rental growth, infrastructure improvements, and population trends should be assessed to determine likely future appreciation potential…
Case Study: Class A Downtown Office Building
Consider a Class A, LEED Gold certified office tower located in the central business district of a growing Sunbelt city. The 300,000 SF building was recently renovated in 2018 and is anchored by a Fortune 100 company leasing 70% of the space on a 10-year lease term. The diverse tenant mix also includes a investment grade law firm and several boutique financial services firms. The asset traded at a 4.5% capitalization rate, below market averages, with 90% LTV financing secured from a commercial bank. The lead investor achieved a 16% IRR over a 5-year hold period through consistent quarterly cash flow and terminal value appreciation. The asset exhibited key traits of a core investment strategy…
Value-Add Investing
Unlike stabilized core assets, value-add properties possess operational issues suppressing current income and valuations. Through improvements, investors can unlock earnings growth and forced appreciation…
Market Data on Potential Gains
According to commercial real estate data provider Reonomy, 93% of commercial asset upgrades generate positive ROI, while 65% produce yields exceeding 10%. Value-add industrial warehouses see the highest median ROI at 16%, followed by office buildings (13%) and retail centers (12%). Strategic renovations and refreshed branding routinely enable 20-30% increases in rental rates. Meanwhile, improved occupancy can drive 30-50% gains in NOI. For context, each 1% increase in occupancy across a 100,000 SF office asset translates to approximately $10,000 in added annual NOI.
Real World Example Deal
Consider the case of a suburban 1980‘s era office complex purchased by DOMAIN Companies, a value-add investment firm…
