Is Opportunistic Real Estate Worth the Risk?

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.

Updated
January 13, 2023
by

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As a real estate investor, if a higher-risk, higher-return strategy fits your overall investment objective, you might consider Opportunistic investing.

In this article:

What are Opportunistic Real Estate Investments?

Opportunistic investments are one of four primary commercial real estate strategies—the others being Core, Core Plus, and Value Add real estate investing. Opportunistic investment strategies sit at the top of the risk and potential return curve.

Opportunistic real estate generally refers to land development, ground-up development, or conversion of an asset from one use to another (e.g., warehouse to retail or vice versa). In either case, the owner looks at the existing site and envisions a redevelopment scenario that creates a higher value use for the property that, once developed, could generate substantial returns.

These highly complicated, often ground-up projects normally take at least 3 to 5+ years to complete.

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. 

How Do Opportunistic Investments Differ from other real estate investment strategies? 

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

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. 

Core-Plus Real Estate 

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 Real Estate 

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 Real Estate 

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. 

Opportunistic Real Estate Examples

Opportunistic real estate investing can usually take three forms:

  1. Land development
  2. Ground-up development (or redevelopment)
  3. Changing a building’s use

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 

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 

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 

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. 

How to Find Opportunistic Real Estate Properties

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.

Real Estate Agents and Brokers 

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.

Real Estate Investment Trusts

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. 

Real Estate Crowdfunding Platforms

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

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.

The Bottom Line 

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.

Are you ready to start commercial real estate investing? Explore how HoneyBricks can provide access to some of the nation’s premier investment opportunities. 

About the Author

HoneyBricks Team

HoneyBricks is a technology platform that connects investors with high-quality commercial real estate opportunities through asset-backed security tokens.

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