Opportunistic real estate is a private real estate investment strategy that involves properties experiencing distress or requiring significant renovations or net new development. While opportunistic strategies tend to take on more risk, they have the potential to generate higher returns than other private real estate strategies that are less reliant on capital expenditure to drive performance.
The asset class emerged in the late 1980s and early 1990s when debt capital became scarce, and owners aimed to offload their properties.
Opportunistic real estate investments typically consist of properties but can include real estate companies, distressed real estate loans, or debt securities.
Opportunistic real estate managers often seek to identify assets at discounted valuations that can generate strong returns through development, operational efficiency enhancements, or capital structure improvements. However, identifying these assets and implementing appropriate changes can be difficult and may rely on specific market conditions.
What Characteristics Are Unique to Opportunistic Real Estate?
Opportunistic real estate investments emerge for several reasons—often through broad dislocation and imbalance in capital markets and demand. These shifts can create distress in capital structures or opportunities to acquire and redevelop existing property at depressed valuations. These transactions can vary in size and may involve large portfolios or single-asset acquisitions.
Opportunistic properties tend to have low occupancy or even vacancies. They may involve more ground-up development on raw land; in other situations, these properties may be in higher-risk locations, such as areas undergoing meaningful changes or within emerging markets.
By adopting a “buy, fix, and sell” approach, managers may acquire properties that require hefty investment before generating a return. Capital appreciation is the primary source of return and depends upon accurate market value assessments at projects’ completion. Thus, opportunistic real estate strategies produce little to no income and generate return only upon exit. This structure can give managers full autonomy of committed capital but comes at the cost of potential liquidity for investors.
Types of Opportunistic Real Estate Transactions
Opportunistic real estate investments can encompass nearly any property type, from industrial to multifamily, office, retail, and hotels.
They tend to employ the following strategies:
Redevelopment: These strategies typically repurpose existing properties into new, higher-demand property types, such as converting retail spaces into mixed-use properties, such as stores, restaurants, and residential apartments.
New development: These strategies include acquiring demolished constructions or underdeveloped land for new developments, such as custom-built industrial facilities.
Business building: These investments encompass integrating operations to generate scale within businesses in emerging or fragmented sectors, student housing expansion enabled by expense reduction, and further acquisitions and development.
Large-scale: Transactions of approximately $1 billion or more that limit competition due to the investment size. Examples include large-scale acquisitions of mixed-used properties aiming to improve operations with new capital and hands-on active management.
Single-asset aggregation: Deals combining single assets and small portfolios to form large high-quality portfolios, including last-mile distribution warehouses in markets with land constraints.
Special situations and distressed: Transactions that consist of offloading depressed assets and repositioning them to maximize value or address inadequate capital structures. An example might be a multifamily portfolio, acquired at a discount but dragged by excessive leverage and floating rate debt.
Risks and Considerations When Investing in Opportunistic Real Estate
Opportunistic real estate investment is risky. Large investment into properties requiring enhancement prior to any return or income inherently requires a high appetite for risk.
Below we outline some risks and considerations when investing in these strategies:
Manager selection and access: The nature of opportunistic real estate assets can make their acquisition and renovation or development work challenging. Advisors and/or their research partners may conduct thorough due diligence to identify managers with extensive real estate experience, operating capabilities, scale, and local market knowledge. For example, some areas might have strong laws limiting certain developments where local knowledge is key.
Scarcity of data: MSCI estimates that professionally managed global real estate assets represent $13 trillion, as of July 2023.1 Despite the vast amount of assets, quantitative analysis within the opportunistic real estate market remains a significant challenge due to the lack of performance data. Like other private real estate categories, the available time series is short and has little granularity.
Leverage: Opportunistic real estate investment strategies employ high leverage, often above 65%.2
J-curve: Opportunistic real estate funds typically use closed-end investment vehicles, which require continuous monitoring and rebalancing to keep exposures in line with the investment strategy’s target. The strategy is expected to follow a J-curve path during the initial investment period given the upfront capital commitment and ongoing expenses, which tend to make income negative in the earlier years of a fund.
Liquidity and volatility: Periods of increased volatility, market instability, and inflation may be the most appropriate for investing in opportunistic real estate. Given the long-term capital commitment requirements, these assets tend to be significantly illiquid.
