Value-add vs Ground-up Real Estate Development

December 10, 2021

Value-Add vs Ground Up Real Estate Projects

The real estate industry in the United States is massive and encompasses a wide range of property types, asset classes and investment strategies. There is something for everyone in the real estate world – whether you’re a conservative investor approaching retirement and focused on protecting your family’s wealth, a young and aggressive investor looking to earn outsized returns in exchange for higher risks and involvement, or something in between, investors can find a property type and deal structure that is tailored to their goals.

At a high level, real estate investments are usually divided into three (or sometimes four) categories, based on the quality of the asset and the associated risk involved in owning the property:

Core/Core Plus: Least Risk, Lowest Reward

Core assets are high-quality properties in excellent condition, usually newly built or renovated. Seen as stable, income-producing assets, core investments attract institutional investors such as pension funds which seek reliable passive income (typically 7%-10% annually) with minimal risk. Core Plus investments are similar, but are generally a few years older or in less-than-perfect condition, and thus are seen as slightly less stable but provide slightly higher returns (8%-11%).

Value-Add: Moderate Risk, Moderate Reward

Value-add properties are those that need “a little bit of love”. Typically older buildings that are outdated, in poor condition, or mismanaged, investors in these assets seek to increase the property’s income by making renovations or improving the management strategy. By doing so, value-add investors can achieve greater returns (11%-15%) than their core/core-plus counterparts, but they also assume the risk associated with turning the property around. Value-add deals are attractive to investors with moderate risk appetites such as middle-aged professionals and private equity funds, who are looking to earn returns greater than provided by lower-risk asset types such as index funds and core real estate assets, but who seek to limit their downside potential by investing in an asset that can be collateralized and already produces some income.

Ground-Up: Most Risk, Highest Reward

Neither Core nor Value-Add investment opportunities would exist if there weren’t people investing in the construction of new buildings. These investments are known as ground-up opportunities, and they are the most profitable projects in the business. Investors in ground-up projects generally earn high returns (in excess of 20%), but with these returns comes increased risk, stemming from the time, effort, and complexity involved in constructing a building from scratch. Investors in a ground-up project rely heavily on a developer’s ability to successfully manage a complex entitlement, construction, and marketing process before the asset in question is able to produce any income. As a result, ground-up or opportunistic investors tend to be individuals with higher return expectations and an interest in actively monitoring their investments (young investors with aggressive investment goals), or organizations seeking to achieve high returns or diversify their portfolios with a mix of risk levels (private equity funds, real estate investment trusts, hedge funds, etc.).

The Mortar Approach:

As a real estate investment and development group focused on creating value for our investors, Mortar specializes in the latter two types of investments: value-add and ground-up opportunities. Our multidisciplinary team of real estate professionals has the breadth and depth of experience required to execute both of these strategies expertly, managing the associated project risks along the way and ensuring timely completion and healthy returns.

With our extensive real estate finance, asset management and property management experience, Mortar is skilled in strategizing and executing value-add improvement plans for existing rental assets throughout New York City. These value-add projects provide our investors the opportunity to invest in real estate equity with considerable upside potential and moderate downside risk, and are typically located in growing, established neighborhoods such as Williamsburg Brooklyn and Astoria Queens.

Mortar leverages its experience further to imagine and execute more complex and highly profitable ground-up projects. As architects, designers and construction managers, Mortar is uniquely positioned to create ground-up projects in New York that are locally appropriate, spatially efficient, and economically sound. Over the past two decades, Mortar has developed an exceptional track record of successfully completing ground-up residential projects in Brooklyn, Queens, and Manhattan, and we currently have several projects in the pipeline as well. To date, Mortar has completed 23 ground-up projects worth $240MM, and provided returns to 193 individual investors with 0 losses. Our consistent success – even through tough periods including the great financial crisis and the COVID pandemic – is a testament to our ability to effectively mitigate risk as a capital manager and skillfully complete projects as a development manager. As a result, we have enjoyed a 93% overall retention rate among our investors.

All investments carry risk, and real estate investments are no different. However, by investing in one of Mortar’s value-add or ground-up real estate investments, investors can choose their preferred level of risk/reward, and by working with Mortar Group’s multidisciplinary team of experts, investors can rest assured that they have a first-rate real estate partner with a long track record of operational and financial success.