Table of Contents

• What is Value-Add Real Estate?

• Key Trends Shaping Value-Add Strategies

• Why are parking garages ideal for value-add invest …

We’re excited to kick off the first part of our Alts Investing Deep Dive Series with a focus on Commercial Real Estate (CRE), specifically Value-Add Commercial real Estate this week. Why this risk category? Because I believe that while some pockets beleive is I realize this might be a bit arcane for a breezy weekly Newsletter advancing financial education. But alternative Investments AKA alts have changed my life and giving me everything I have to provide a great life for my family so understanding the power of all is like a magic wand… 

 …and I want everyone to have the power of that magic. So lets dive into our first alts deep dive.

What is Value-Add Real Estate?

Value-add real estate involves acquiring underperforming or distressed properties and enhancing their value through improvements and active management. These properties usually have existing income but need significant capital investment to unlock their full potential. Improvements can range from minor renovations to major repositioning efforts, such as updating outdated systems, enhancing common areas, and rebranding. The goal is to increase occupancy rates, raise rental income, and ultimately sell the property at a higher valuation. This approach allows investors to capture returns through both cash flow and appreciation.

Why Value-Add Real Estate is a Great Idea

Value-add real estate investing offers a compelling mix of risk and reward. Here’s why it’s a popular investment strategy:

• Higher Returns: By actively improving properties, investors can significantly increase their net operating income (NOI) and property value, leading to higher potential returns compared to core or core-plus strategies.

• Balanced Risk-Reward Profile: Positioned between core and opportunistic strategies, value-add investments offer moderate to high risk with correspondingly high returns. They are less speculative than opportunistic investments, making them a balanced option for investors seeking higher returns without the highest level of risk.

• Capital Appreciation and Income: Investors benefit from both rental income during the holding period and capital gains upon sale. Improvements to the property attract higher-quality tenants, increase rents, and enhance the overall value of the asset. 💼

• Downside Protection: Value-add investments typically focus on properties with strong in-place income in lower volatility sectors. This provides a buffer against market downturns and helps maintain steady cash flows. 🛡️

• Market Flexibility: The ability to improve and reposition properties allows investors to adapt to changing market conditions and capitalize on growth opportunities in different regions and property types.

A simpler version of the graph above…

Stages of Value Add Projects

Investors in value add properties typically follow a multi-phase approach:

1. Acquisition: Identifying and purchasing an underperforming asset at an attractive price. For example, an investor may find a residential complex with high vacancy rates due to outdated interiors and lack of amenities. The purchase price reflects these issues, providing a lower entry point for the investor.

2. Improvement: Implementing value-add improvements such as modernizing units, enhancing amenities, and optimizing property management. This could involve renovating kitchens and bathrooms, adding a fitness center, or implementing a new property management system to improve tenant satisfaction and retention.

3. Repositioning: Rebranding the property and adjusting rental rates to reflect the upgraded status. After improvements, the property may be marketed as a premium living space, justifying higher rents and attracting a new demographic of tenants.

4. Stabilization: Achieving higher occupancy rates and operational efficiency to improve NOI. The focus here is on maintaining high occupancy through competitive pricing and excellent customer service, leading to a steady stream of rental income.

5. Disposition: Selling the property at a higher value, reflecting the improvements and increased income. The end goal is to sell the property for a profit, capitalizing on the increased value due to the strategic improvements made.

Key Trends Shaping Value-Add Strategies

The real estate investment landscape is changing rapidly, driven by sustainability goals, evolving tenant expectations, and technological innovations. Here are five key trends shaping the industry:

1. Embracing Sustainability: Investors are increasingly focused on integrating environmental considerations into their asset management approach. Energy-efficient buildings are more attractive to tenants and investors, driving efforts to retrofit existing buildings to meet evolving environmental standards. 🌱

2. Active Asset Management: As tenant needs evolve, landlords must adopt proactive strategies. This involves understanding and meeting tenant needs, offering tailored amenities, and leveraging operational management to stay competitive. 🤝

3. Leveraging Technology: Technology plays a pivotal role in driving value creation within real estate. Innovations like smart-building technologies and data-driven insights help investors make informed decisions and optimize property performance. 🏢

4. Operational Excellence: Focusing on operational excellence is critical for realizing value creation. This includes strategic investments in asset enhancement, tenant experience improvements, and effective asset management. 🌟

5. Local Insights: Strategic market insights and risk management are key drivers of real estate investment performance. Investors diversify their portfolios based on nuanced subsector and geographical market dynamics to optimize asset performance and mitigate risks. 🌍

Value-Add Case Study: Noyack's Mobility Hub™ Initiative

Why are parking garages ideal for value-add investments?

1. Because they have stable income,

2. parking usually has inelastic demand for their spaces,

3. they are large facilities with sometimes giant, whole-block footprints.

4. and they are easily transformed into another use especially micro fulfillment

Noyack Logistics Income REIT (NREIT) developed a plan to transform large structured parking garages into a micro fulfillment depots known as Mobility Hubs™. 

Their first attempt was the Columbus Mobility Hub, a 1200 space garage formerly known as the Leveque Parking Garage in downtown Columbus, Ohio, 

The Investment Thesis: Noyack’s strategy focused on converting structured parking facilities into multi-use logistics hubs due to their excellent locations, substantial size, and good access.

Planned Operational Enhancements and Technological Upgrades: Noyack is planning to modernize the parking operations by installing an automated parking system, introducing cashless payment systems, and equipping the facility with LIDAR scanning sensors and LED boards for dynamic pricing.

New Revenue Streams: Several new revenue streams were introduced, including:

• Amazon & Walmart Delivery Lockers: Convenient pickup points for customers. 📦

• EV Charging Stations: Catering to the growing number of electric vehicles. 🔋

• Robotic Delivery Drone Hub: Preparing for future logistics innovations. 🤖

• Cold Storage Pods and Vehicle Storage: Diversifying the use of the space to attract various tenants. 🚗

Value Creation and Financial Success: The transformation will result in a significant increase in value by 1) increasing revenue,  and 2) re-categoring the asset into a more desirable logistics c atrogey instead of the niche parking category. Logistics real estate get much more attractive purcxhase prices.

Strategic Insights: Noyack’s approach to the Columbus Mobility Hub highlights several key strategies:

• Vision: Identifying opportunities not apparent to others. 👀

• Acquisition Acumen: Leveraging creativity and experience to achieve positive outcomes. 💡

• Operational Expertise: Enhancing profitability and exploring new classifications. 📈

• Technology Savvy: Using technology to drive profit margins and reduce expenses. 💻

• Debt Strategy: Skillfully utilizing debt to enhance value and improve returns. 📊

Despite the challenges posed by today’s economic climate, value-add real estate investments remain a compelling strategy for achieving higher returns. The Columbus Mobility Hub case study showcases the potential of innovative value-add strategies to drive significant value creation and adapt to changing market conditions.

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