Opportunistic investment strategies sit at the top of the risk and potential return curve. See if they are a good fit for your investment objectives.
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If you're a real estate investor seeking high-risk, high-return opportunities, opportunistic investing might align with your investment objectives.
In this article, we will explore the concept of opportunistic real estate investments, discuss their distinctive features, provide examples of projects, and offer insights on how to find these investment opportunities.
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Opportunistic investments are one of four primary commercial real estate strategies—the others being Core, Core Plus, and Value Add real estate investing.
Situated at the highest level of risk and potential return, opportunistic investments typically involve land development, ground-up development, or repurposing existing assets. These highly complex projects require significant time and financial commitments and are typically pursued by experienced real estate sponsors and developers.
For example, ground-up projects normally take at least 3 to 5+ years to complete with thousands of moving pieces or things that might not turn out as planned. During that time, the site is generally not earning any income that can be used to offset the carrying operating expenses—including but not limited to property taxes, insurance, and debt service. Most opportunistic deals are acquired with between 50% to 70% leverage depending on whether they are a land deal or anticipated conversion.
In addition to carrying costs, the owner will likely be fronting the cost for architects, engineers, permitting consultants, attorneys, and other third parties needed to bring their vision to fruition.
These costs add up. Opportunistic deals can often cost the owner tens of millions of dollars before they receive a single cent in income. As such, opportunistic real estate deals are typically only pursued by highly sophisticated real estate sponsors and developers with years of experience under their belts.
Commercial real estate investors use the term “opportunistic” loosely. They’ll refer to the opportunistic strategies they use to acquire undervalued properties that need varying degrees of physical improvements.
In most cases, the owner is likely referencing Value Add or Core Plus real estate. In other words, the owner sees an opportunity to improve and create more consistent cash flow—which is decidedly different from what’s technically considered an opportunistic real estate investment.
Here is a look at the differences between Core, Core Plus, Value-Add, and Opportunistic Properties:
Core real estate is usually a fully stabilized, Class A building in a strong market with a growing economy. Core investments tend to have predictable income and are considered low risk. Private equity firms often own core properties.
These include older properties located in primary markets, as well as Class A/B properties located in secondary and tertiary markets. Core-Plus real estate is often of a slightly older vintage than Core properties and may require slight physical and operational improvements needed to realize the property’s full potential. Core-Plus properties are usually low to moderate-risk investments.
Value add investments refer to properties that need substantial renovation or operational improvements to stabilize at or above local market rents.
A “light” value-add strategy might involve refreshing each apartment unit with new paint, carpet and fixtures and replacing the management company with one that’s more professional and aggressive about rent collections.
A “heavy” value-add strategy could include gutting a property to the studs, reconfiguring the units, and upgrading the building systems and façade. However, even heavy value-add strategies assume the property types remain as-is, and no use change is required.
💡Learn more: Is value-add a good investment?
Opportunistic investments include both ground-up construction on undeveloped land as well as a major overhaul of an existing structure that is changed or repurposed from one property type to another.
Opportunistic properties tend to have a long-lead time and generate no cash flow in the interim. Opportunistic real estate investments are very high risk and should only be contemplated by experienced real estate sponsors and developers.
A strategy of opportunistic real estate is a strategy that capitalizes on market conditions and changes to achieve higher returns.
For example, demand for ground up development is normally driven as cities expand and urbanization continues, which can create a shortage of affordable housing options to accommodate the growing population. Booming cities attract businesses, job opportunities, and a surge in population, creating a high demand for housing. In such cases, opportunistic real estate investors can identify opportunities to develop new residential properties to meet the housing needs of the expanding urban population.
Austin, Texas, serves as an example of a city where new real estate development emerged to meet housing needs during a period of rapid growth. The city experienced a surge in population due to factors like the booming tech sector and a favorable business environment. This led to a shortage of affordable housing options.
Opportunistic real estate investors seized the opportunity by acquiring land in strategic locations and initiating ground-up development projects. They transformed underutilized properties into modern residential communities, helping address the housing shortage and accommodate the growing population. These investments contributed to the city's economic growth with the city rapidly becoming a technology and manufacturing hub.
Similary, rapid changes in renter preferences, advancements in technology, or unexpected events (such as the pandemic) can render certain property types or locations obsolete. A property that was once thriving as an office space, for instance, may suddenly face challenges due to the accelerated shift towards remote work. In such cases, opportunistic investors can seize the opportunity to repurpose the property into a mixed-use development or multifamily asset, generating substantial returns through strategic repositioning.
Similarly, shifts in capital markets can create distress or distress-like situations for property owners. Unforeseen rises in interest rates or changes in lending conditions can disrupt financing plans and put pressure on property owners who relied heavily on debt or anticipated refinancing at specific rates. Such scenarios provide opportunities for opportunistic investors to step in and capitalize on distressed situations, acquiring assets at lower-than-anticipated acquisition bases and unlocking value through strategic management and repositioning.
Leverage plays a significant role in determining the risk profile of a real estate investment. It is important to understand how different investment strategies utilize leverage and how it affects the overall risk and potential returns.
For example, opportunistic investments often employ higher leverage, sometimes exceeding 70% or more, as these projects require substantial upfront capital. However, it's important to note that the availability of debt may vary depending on the specific project. In contrast, core investments typically utilize lower leverage, around 40-45%, to maintain stability and minimize financial risk.
While higher leverage can magnify potential returns, it also increases the exposure to financial risk - so It's crucial for investors to assess their risk tolerance and ensure that the chosen investment aligns with their comfort level. It's worth noting that excessive leverage can be detrimental, especially during market downturns, as it can lead to challenges in meeting debt obligations or even foreclosure in severe cases.
When considering opportunistic real estate investments, one of the crucial factors to evaluate is the experience and track record of the sponsor or developer. Successful execution of opportunistic strategies demands a deep understanding of the intricacies involved, as well as the ability to navigate complex and challenging projects.
Investors should prioritize sponsors or developers who have a proven track record of success with similarly opportunistic investments. This experience indicates their ability to handle the unique demands and risks associated with such projects. Look for sponsors who have demonstrated expertise in the specific business strategy, property type, and market in which they are operating.
Opportunistic real estate investing can usually take three forms:
Given these different avenues, generally, different locations bring opportunities for different projects. For example, an opportunistic development in a new city might be a ground-up apartment development - while in an existing city, repositioning an office building into apartments might be a more common project.
Land development occurs when a site (often referred to as a “greenfield site”) is developed for the first time. Land development can be more or less challenging depending on the local zoning.
Let’s say a 15-acre property is zoned for industrial use, but an owner thinks this is a good site for multifamily development. In this case, the owner would need to pursue a rezoning of the property before moving forward with construction.
Land development can be incredibly complicated when the road, water/sewer, and other utility infrastructure does not already exist. In such situations, the owner may need their master planning, engineering, and architect teams to lay out an entirely new street network. They’ll also need to work with the water/sewer and utility companies to extend service to the plot of land they intend to redevelop. This time-consuming and expensive process adds to the total development timeline.
Ground-up development can either refer to land development or, alternatively, the construction of a new building where one already exists. The latter requires clearing the property (including demoing any existing structures) and, sometimes, environmental remediation, depending on the property’s prior uses.
There can be significant risks associated with ground-up development, including permitting risk, construction risk (especially as labor and material prices rise), and financing risk, as most construction loans are only valid through a certain period of time.
Changing a building’s use is a third and increasingly popular form of opportunistic real estate investing.
This is when an existing structure is renovated and repurposed for an entirely different use.
For example, the recent industrial boom has led many owners to redevelop their properties from retail (especially big box retail) to warehouse. Many shopping centers and malls are being redeveloped into mixed-use complexes that feature an array of uses, ranging from housing to life sciences.
In a post-Covid world where office buildings continue to face high vacancy, many investors are pursuing conversion to an apartment building or life science uses.
Changing a building’s use is easier said than done. Certain uses require higher floor-to-floor heights than most office buildings offer. Residential buildings need to be laid out with smaller floor plans and different cores. This makes the risk profile of building conversion.
In practice, only the most sophisticated real estate investors and developers pursue buying opportunistic properties. These are very capital-intensive projects that typically do not generate predictable cash flows for years. As such, the sponsor often needs patient and institutional capital backing to see these deals through to completion. That said, there are ways to invest alongside an experienced sponsor, as we’ll outline below.
Agents and brokers will generally bring opportunistic deals to the market in a very discrete fashion.
They may only invite certain developers to bid on the deal based on their relationships or expectation that those developers can execute an opportunistic investment strategy.
They will usually issue an offering memorandum with information about the deal and will do a “call for offers” to see which developers are interested. Most opportunistic investments go through multiple offer rounds before the owner selects their preferred buyer or joint-venture partner.
REITs are a great way for people to access opportunistic real estate deals. Many of the largest opportunistic real estate investors are publicly traded REITs.
Companies like Blackstone, Nuveen, and Equity Residential invest in opportunistic real estate.
Another option investors can consider is real estate crowdfunding platforms. These online platforms allow individual investors to invest passively in real estate syndications that target Opportunistic investments.
HoneyBricks, for example, provides a platform for individual investors to connect with Opportunistic real estate investors and invest in fractions of the project for as little as $5,000.
Unlike investing in a REIT, where you’re not investing in the property directly, investments with HoneyBricks represent ownership interests of the asset. This creates a tax-advantaged structure for investors and provides more control over which investments you allocate your capital towards.
Public-Private Partnerships are another way to find opportunistic real estate properties.
Many cities and state governments (and their associated agencies) are looking for ways to maximize their land values. Increasingly, government entities are willing to partner in a joint venture (through air rights, long-term ground leases, or outright property sales) that allow a site to be repurposed for higher and better use.
One example may be a transit authority selling the air rights above a parking garage or train station that a developer then used to build above the existing property.
Opportunistic real estate investing is not for the faint of heart. It can be highly complex with lots of different variables but offers the potential for tremendous returns. To realize those returns, the opportunistic investors must be highly qualified, with an equally talented team of architects, engineers, and other consultants providing support. Most opportunistic deals involve dozens of people who play important roles.
If you have a high-risk tolerance and patient capital, you may want to consider investing in opportunistic real estate. As with any investment, opportunistic deals should be made within an otherwise diversified portfolio.
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