Five trends shaping value-add strategies

Capital raised for value-add funds has been falling since 2021, but many analysts believe commercial real estate will experience some recovery in 2024's second half.

In the dynamic landscape of real estate investment, managers seeking to enhance asset value and achieve higher returns are focusing on more strategic approaches. But creating value in individual properties in today’s economic climate of falling valuations, rising inflation and higher-for-longer interest rates is no easy task.

From a fundraising standpoint, PERE data shows that capital raised for value-add funds has been falling since 2021, representing a 41 percent drop from a high of $71.7 billion that year to just $42.4 billion in 2023. When looking at specific sectors being targeted by value-add funds in recent years, it is clear times are changing. Sector-specific closed-end funds in the value creation space have been shying away from offices since the onset of the pandemic and moving out of retail since even earlier. So far in 2024, it appears there has been a pullback in residential investment as well, with industrial and specialty property types filling the void.

Still, many analysts agree that the second half of 2024 will see some recovery across the commercial real estate industry as participants become more confident in improving conditions. The need for increased capital formation in the value creation space will increase as well.

Meanwhile, the real estate investment landscape is also undergoing profound transformations driven by ESG imperatives, evolving tenant expectations, and technological innovations, as well as operational management and market insights. For investors and managers, pursuing value-add strategies offers strategic pathways to optimize returns and navigate the evolving real estate market. Five key trends shaping the industry today are driving investor interest in various strategies to increase asset value.

1. Embracing sustainability

A fundamental trend reshaping real estate investment strategies is the increasing emphasis on sustainability and the energy transition. Investors are recognizing the importance of integrating environmental considerations into their asset management approach and the resulting increase in value.

After all, real estate owners and investors are realizing that sustainability is not just a moral imperative but also a financial one. Energy-efficient buildings are becoming more attractive to tenants and investors alike, and so investors are therefore looking for ways to retrofit existing buildings to meet evolving environmental standards.

This trend is reflected in asset pricing, with energy-efficient properties commanding higher valuations. As a result, there is a notable shift toward efforts to establish industry-wide reporting standards and more transparent and consistent evaluation of assets. Collaboration across the industry is key to establishing best practices and ensuring a smooth transition toward a more sustainable built environment.

2. Active asset management

As tenant needs continue to evolve, landlords must adopt proactive strategies to meet these demands. The risk of longer-term asset obsolescence looms large for properties that fail to adapt to changing needs.

To stay ahead, real estate managers are investing in staff training and fostering collaboration across the industry. A customer-centric approach involves understanding and meeting the needs of tenants, offering tailored amenities and leveraging operational management.

Moreover, the demand for amenity-rich spaces is driving landlords to provide more than just physical spaces. Tenants expect more, prompting owners to invest in amenities like concierge services, wellness facilities and modern technologies to enhance tenant satisfaction, attraction and retention.

3. Leveraging technology

Technology and innovation are playing pivotal roles in driving value creation within the real estate sector. From operational efficiency to catering to logistics and transportation needs, advancements in smart-building technologies are reshaping investment strategies.

For instance, new concepts are integrating logistics properties with EV technology, anticipating future demand. Sensors that monitor energy consumption and property usage are increasing operational efficiency and reducing costs, in turn enhancing asset value.

Such innovative approaches transform existing assets, while data-driven insights are empowering real estate investors to make informed decisions and optimize performance. Advanced analytics and new technologies enable proactive maintenance, management and tenant engagement, thereby driving up property values.

4. Operational excellence

Operational expertise is emerging as a critical component in realizing value creation. The shift toward asset-level strategies emphasizes the need for deeper market insights, tenant-focused offerings and business plans aligned with investor objectives.

Real estate investors are increasingly focused on generating returns through incremental net operating income growth. This approach, focused on operational excellence, involves strategic investments in asset enhancement, tenant experience improvements and leveraging in-house or third-party teams for effective asset management.

Asset managers are adopting integrated operational platforms and leveraging data analytics to optimize property performance and mitigate risks. By prioritizing operations, investors can unlock hidden value within their portfolios and maximize returns in today’s competitive market.

5. Local insights

In a rapidly evolving industry, strategic market insights and risk management are key drivers of real estate investment performance. Investors in markets around the world are diversifying their portfolios based on nuanced subsector and geographical market dynamics, aiming to optimize asset performance while mitigating risks.

Value creation strategies are centered on identifying growth opportunities within attractive subsectors and executing business plans aligned with investor objectives. This signifies a departure from larger sector-level trends toward asset-specific value drivers, ensuring sustainable returns amid local market fluctuations.

Furthermore, proactive risk management strategies, including scenario planning and stress testing, enable investors to anticipate market shifts and optimize portfolio resilience.

By incorporating strategic market insights into investment decisions, investors can navigate uncertainties and capitalize on emerging trends effectively.