Value-add real estate funds have been attracting attention in recent months, as institutional investors seek opportunities to maximize returns in a market that’s shifting beneath their feet. With rising debt costs and ongoing uncertainty in global real estate markets, many are looking to value-add strategies as a promising avenue for strong risk-adjusted returns.
Investment managers in both the U.S. and Europe have been actively raising capital for value-add strategies, which focus on properties that offer untapped potential—whether through renovations, redevelopment, or operational improvements. In the U.S., for instance, Crow Holdings has raised an impressive $3.7 billion for its value-added real estate strategy. Meanwhile, Pennybacker Capital’s sixth U.S. value-add fund closed at $1.6 billion, with notable allocations from institutional heavyweights like the Texas Permanent School Fund and New York State Teachers' Retirement System. Across the Atlantic, Swedish value-add fund Revelop has drawn in more than SEK2.4bn ($231 million), showing that interest in these strategies is not limited by geography.
Why Value-Add?
The current surge of capital into value-added strategies comes at a time when the broader real estate market is grappling with several macroeconomic headwinds. Higher interest rates, the lingering effects of the pandemic on office and retail sectors, and rising sustainability expectations are all forcing investors to reassess their approaches. In this environment, value-added investments—those that involve acquiring properties that require enhancements or repositioning—are viewed as a way to create value in otherwise stagnant or challenging markets.
Tim Graham, Global Lead for International and Strategic Capital at JLL, has noticed this growing momentum. “Investors are increasingly focused on allocating capital to strategies that promise to deliver strong risk-adjusted returns, especially as return requirements have risen due to higher debt costs,” Graham explains.
Value-add approaches now account for 56% of investor preferences in the annual ANREV/INREV/PREA Investment Intentions Survey. This trend isn’t just about financial returns either. As sustainability becomes a bigger factor in investment decisions, many value-add strategies are incorporating environmental, social, and governance (ESG) efforts. Participation in the Global Real Estate Sustainability Benchmark (GRESB) by value-add funds tripled between 2019 and 2023, highlighting the growing emphasis on sustainability within this sector.
Office Assets in the Spotlight
The office sector, in particular, has become a focal point for value-add investors, though the dynamics are complex. Offices have faced mounting pressure in the wake of the hybrid work era, as tenant expectations evolve, and companies reassess their space requirements. These changes have led to a repricing of office assets, especially in major markets like London, Paris, and New York, creating opportunities for value-add investors to step in.
But the deployment of capital in value-added office deals remains cautious. As Graham notes, much depends on market dynamics and macroeconomic factors, particularly interest rate movements. While there’s plenty of capital ready to be deployed, actual investments have been slower to materialize, with investors carefully watching for signs of stability in interest rates and the broader economy before making their moves.
Cameron Ramsey, Senior Director of Capital Markets at JLL, sees opportunities emerging in the mid-price range of major office markets, particularly in the €50 million to €100 million ($108 million) range. “Current owners of core-plus office assets who are looking to upgrade their building are facing a decision between either capital expenditure on upgrades—or selling at a discount,” says Ramsey. This presents value-added investors with a potential pathway to acquiring well-located, underperforming assets at favorable prices.
Sustainability: A Key Factor
One of the most compelling aspects of the value-add approach is the ability to incorporate sustainability upgrades into existing buildings. As the demand for energy-efficient, environmentally conscious buildings grows, properties that undergo sustainable transformations are becoming increasingly attractive to tenants and future buyers. This focus on sustainability is particularly pronounced in the office sector, where older buildings are being retrofitted to meet the new standards of carbon emissions, energy efficiency, and overall environmental impact.
Graham believes that the growing focus on sustainability will continue to drive interest in value-add strategies. “Momentum has been building for capital to be deployed into value-add and opportunistic strategies,” he says, noting that many investors are keen to align their portfolios with ESG principles while still seeking solid returns.
The Road Ahead
As the market continues to adjust to rising interest rates and the aftershocks of the pandemic, the future of value-add strategies will depend on how quickly capital can be deployed. For now, investors are eyeing opportunities in offices, but they are proceeding cautiously. Larger deals, particularly those above €100 million, carry perceived exit risks, as it’s unclear when or if core buyers will return in force. For value-add players, much depends on the timing of these core investors returning to the market, as their participation is often crucial to successful exit strategies.
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