Interest in the space appears to be rapidly rising
It’s a trend that’s gathered pace in the commercial real estate world in recent times: the growth of so-called operational real estate (ORE), a phenomenon emerging as investors seek to take a less passive approach to the market.
Opportunity for commercial brokers in that market segment, a sector where investors’ returns follow directly from profits generated by businesses on the premises, seems to be on the rise. That’s partly because of a post-COVID rebound – but equally due to a sharp change in tack among real estate owners.
Diana Brummer (pictured top) is co-chair of global real estate practice at Goodwin, a multinational law firm. She told Mortgage Professional America that the outlook of those with a stake in the market appeared to be evolving. “I think real estate owners and operators are becoming more creative and they’re less passive in their ownership and the way they think about it,” she said.
“The real estate owner, operator, investor mindset is starting to shift around: ‘Why was I always just thinking about rent for real property when there’s lots of different ways to monetize owning real estate?’”
That’s evolving partly because of wider changes taking place across the real estate market. In the office space, for instance, so-called “tenant experiences” – extras aimed at making the building and facilities more attractive – have emerged as a new supplemental income stream, albeit a minor one.
No sign of investor appetite for ORE slowing
A pivot by real estate investors away from only focusing on rent for income has seen greater consideration being paid in the commercial realm to other opportunities: car parks, hospitals and medical practices, hospitality and leisure facilities, and self-storage, to name but a few.
That’s a trend that shows little sign of receding, according to Brummer. “Entertainment, wellness, a convergence of what’s been regarded as private equity historically and real estate – I think there’s going to be a lot of uptick in that area,” she said.
Melissa Tubau of Lock It Lending notes that many potential buyers are holding off, waiting for even lower rates, but warns that timing the market perfectly is nearly impossible and could lead to increased competition and higher home prices.
— Mortgage Professional America Magazine (@MPAMagazineUS) September 4, 2024
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The term has emerged as a catchall to describe forms of real estate that didn’t typically fall into a conventional asset class but have emerged as a solid opportunity for investors to add value and supplement profits.
The hotel space, for instance, is a “paradigm” of operational real estate: “The revenue is not rent from real property,” Brummer explained. “It’s revenue from a realistic asset, in the case of an overnight event, food and beverage, [etc.] …
“If you think of that as classic operational real estate, we see a huge uptick in focus on operational real estate. We’ve been spending a lot of time on that. It could be bowling alleys, it could be senior housing, student housing – those are all operational real estate in part too.”
Why prospects for ORE are bright despite overall market headwinds
While plenty of instability continues to roil the commercial real estate market – and despite some pessimism about its prospects – the outlook for ORE is brighter than other sectors, according to a 2023 report by Goodwin.
The company said in March of that year that the segment was unlikely to be as impacted as heavily by the global economic downturn as other asset classes and emphasized the prospect of investors adding further ORE investments to their portfolios with the aim of capitalizing on its potential for higher returns.
The pandemic generated significant headwinds for the US commercial real estate sector, a storm it still hasn’t fully recovered from. Nonetheless, it also helped to super-accelerate the uptake of ORE, Goodwin said.
That’s because users and occupiers increasingly expect more services and facilities in their properties – and employers are also sitting up and taking note of how to better attract employees back to the workplace.
Potentially increasing revenue per square foot or meter is an enticing prospect for hotels and other businesses by activating underutilized space, Goodwin noted, and “ORE investors that can drive superior operational performance have greater potential to attract users and occupiers who are increasingly looking for services and other offerings, not just space.”
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