Value Add

A real estate investment strategy categorized by medium-risk and medium returns. A Value-Add Strategy typically involves acquiring under-performing assets with upside potential and adding value through one or more repositioning strategies.

These strategies may include property renovation, tenant realignment, operational improvements, lease-up, and re-tenanting strategies among others with the goal of boosting net operating income, and thus increasing the value of the property.

The Four CRE Risk Profiles

• Core
• Core Plus
• Value Add
• Opportunistic

Putting ‘Value Add’ in Context

Granite Peak Partners, a seasoned real estate investment firm, recently targeted Summit Office Park for a value-add investment. Located in suburban Chattanooga, Tennessee, Summit Office Park comprises three office buildings with a total of 150,000 square feet. At the time of acquisition, the property was 70% occupied, primarily by tenants in traditional sectors such as insurance and real estate services, with rent rates significantly below the market average for comparable properties in the region.

Scenario:

Summit Office Park had struggled with tenant retention and satisfaction due to its outdated facilities and management inefficiencies. Recognizing the potential for significant value creation, Granite Peak Partners formulated a strategic plan focusing on three main areas:

• Property Renovation: The firm allocated a substantial budget to modernize the façade and interior of each building, upgrading the HVAC systems, and enhancing the common areas and landscaping to appeal to a broader tenant base, including tech startups and creative agencies seeking modern and efficient workspaces.
• Operational Improvements: Granite Peak introduced a new property management team with a mandate to improve tenant services, streamline operations, and reduce overhead costs through more efficient vendor contracts and energy-saving measures.
• Re-tenanting Strategy: With renovations underway, the firm embarked on an aggressive marketing campaign aimed at repositioning the property in the market. The goal was to attract higher-paying tenants from growing sectors such as technology and professional services, thus increasing the occupancy rate to 90% and adjusting rents to reflect the improved quality and desirability of the office space.

Financial Goals:

The objective was to boost the net operating income (NOI) from $1,200,000 to $1,800,000 within three years, primarily through increased occupancy and higher rents. This would in turn increase the overall value of the property, setting the stage for a profitable exit through sale or refinancing at a significantly higher valuation.

Note: This scenario is hypothetical and is intended to illustrate the application of a value-add strategy in commercial real estate investment.