Over the past few decades, real estate investment has become increasingly sophisticated. Large institutional investors and developers have seen the line blurred between traditional investment banking for securities and that for real estate. Everything from the market analysis to the financing of the project has changed.

Investors in commercial real estate often classify projects and assets into various classifications, which we’ll try to explain below. In similar fashion to classifying office space as Class A, B, C, there is no absolute criteria by which an asset is graded, but most investment professionals are able to generally agree on which category an asset falls under. That said, the classifications investors generally hear about are:

  • Core, or Core-Institutional: These assets are the highest-grade real estate asset. They are easier to finance, and generally command the lowest Capitalization Rates. An example of a core-institutional investment would be a fully or nearly fully-leased office property in a historically strong office market such as San Francisco or New York City.
  • Core-Plus: A Core-Plus asset is an asset which is also high quality, yet one which represents to an investor the opportunity increase the asset’s investment yield through some event. For example, the asset might have some scheduled vacancy or leases rolling over which would give the owner the opportunity to increase rents. Another characteristic of Core-Plus is an asset which could benefit from some upgrades or renovations by which the investor could then command higher rents and improve his return.
  • Non-Core: These assets generally fall into the “B” category. An example might be a “C” asset in an ”A” location, or even a Class A asset located in a secondary (”B location”) or tertiary market. These assets are generally overlooked by larger institutional investors, and generally have a higher vacancy rate, and slower rental rate growth, and investors demand a higher Capitalization Rate when acquiring these assets.
  • Value-Add: Assets which fall into this class are those where a buyer has an opportunity (that’s the expectation at least) to acquire an asset, and add significant value through a major event. An example of a value-added asset might be one which an investor acquires an older office building, performs significant renvoations to the building’s interiors and exterior to reposition it from a Class B asset to a Class A, and leasing it at higher rates. Another example is an investor acquiring an asset and increasing density, to add value. Value Add is generally the riskiest investment class of those we have discussed so far.
  • Opportunistic, Distressed: These assets represent one of the highest levels of risk for a property investor. An example could be a bank foreclosure or an asset whereby the seller is in financial difficulty. Given the condition of capital markets today, many are expecting these opportunities to begin to surface and funds have been setup to focus specifically on these types of investment. An example of an opportunistic deal would be to acquire a note on a property belonging to a troubled seller, negotiate control of the property, and then provide the equity or financing to renovate the property.
  • Development, Redevelopment: These types of assets represent those whereby a buyer could acquire an asset which would benefit from a higher and better use. They can either be ground up development, or a redevelopment of an existing site. These assets demand the highest returns because of the inherit risk in both acquiring and constructing the asset, but also leasing and market risk taken on by the investor and/or developer. A local example would be Santana Row. The site Santana Row sits on was formerly a Town & Country shopping center, a single-story, surface-parked retail center. Federal Realty (NYSE: FRT) acquired the property and re-developed into a massive mixed-use project encompassing hotel, condos, apartments, retail, and office.