What does "build to core" mean in real estate?

What is the "Build to Core" Strategy in Real Estate?

"Build to core" is a strategy in real estate investment where an investor or developer constructs a new property with the intention of creating a core asset. Core assets are typically high-quality, well-located, and low-risk properties that generate stable, predictable income streams. These properties are often sought after by institutional investors for their long-term value and resilience to market volatility.

In a build to core strategy, the developer takes on the initial risk and effort of developing the property—from securing land and financing to managing the construction process and leasing. The goal is to develop a property that meets the criteria of core real estate investments: prime location, high occupancy rates, creditworthy tenants, and minimal outstanding capital expenditure needs.

This approach contrasts with buying existing core properties, which may be less risky but also come with a premium price due to their established income and lower risk profile. Build to core allows investors and developers to potentially enter the core market at a lower initial cost, with the intention of the property evolving into a core asset through successful development and stabilization. Once the property achieves a stable occupancy and income level, it can be considered a core asset, attractive to investors looking for lower-risk, long-term investments.

Hypothetical Build-to-Core Project in Multifamily Real Estate

Project Name: Uptown Flats

Location: Sunnyvale, California (growing tech hub with strong demand for housing)

Target Market: Young professionals, families with young children

Project Details:

• Number of Units: 250 (mix of studios, 1-bedroom, and 2-bedroom apartments)
• Amenities: Fitness center, pool, dog park, rooftop lounge, co-working space, EV charging stations
• Unit Finishes: Modern, high-end finishes with energy-efficient appliances and smart home features
• Construction Timeline: 24 months

Development Phase:

• Land Acquisition: Secure a 3-acre parcel in a desirable location with access to public transportation, schools, and shopping. (Estimated cost: $10 million)
• Entitlements and Permits: Obtain necessary permits and approvals from local authorities. (Estimated cost: $1 million)
• Design and Construction: Partner with a reputable architect and contractor to design and build the apartments. (Estimated cost: $50 million)
• Marketing and Leasing: Launch a marketing campaign to attract potential tenants and begin pre-leasing. (Estimated cost: $500,000)

Stabilization Phase:

• Lease-Up: Achieve full occupancy within 12 months of completion.
• Property Management: Hire a professional property management company to handle day-to-day operations.
• Financial Performance: Project initial cash flow to be negative during the first two years, followed by positive cash flow and increasing income over time.

Exit Strategy:

• Hold for Long-Term Income: Hold the property for 10-15 years to generate rental income and benefit from potential appreciation.
• Refinance and Recapitalize: Refinance the property to extract equity and invest in other projects.
• Sell the Property: Sell the property to a institutional investor at a premium after it has fully stabilized and appreciated in value.

Key Considerations:

• Market Demand: Ensure strong demand for the type and size of units being built in the chosen location.
• Construction Costs: Accurately estimate and manage construction costs to avoid budget overruns.
• Leasing Strategy: Develop a competitive leasing strategy to attract and retain tenants.
• Financial Projections: Create realistic financial projections to assess the project's viability and potential returns.