PREA Quarterly: The changing definition of core real estate

This article first appeared in the Spring 2024 edition of PREA Quarterly

LaSalle’s Global Head of Research and Strategy, Brian Klinksiek, discusses how the definition of core real estate is changing for investors, and what that could mean for their strategies.

A surprising standout as the most conversation-provoking exhibit from LaSalle’s ISA Outlook 2024 is titled “LaSalle’s Changing Definition of Core.” The simple table, reproduced for this article, contrasts a traditional core mind-set against an emerging “new” core mind-set. The former is focused on classic real estate metrics, such as credit quality and lease length, and flatters the property types that tend to score well against them, such as office. The latter is a more evidence-based approach focused on predictability and growth of actual cash flows, a lens that tends to favor the living sectors and niche property types and subtypes, such as medical office.

Taking a step back, the definition of core can be framed in various ways. It may be cast in relation to the other main “styles” of real estate investment—value-added and opportunistic—in that core is supposed to offer lower but safer and more predictable returns than either of those. Defining this with specificity might involve formal labels and thresholds, such as maximum leverage levels and property type characterizations. Assets and portfolios on the correct side of such definitions would be considered core and those beyond them would not be. Of course, financial theory suggests that the fundamental value of an asset should derive from the characteristics of its cash flows, not its conformance with metrics, criteria, and labels. Given that core portfolios are meant to deliver more reliable returns than non-core ones, an understanding of their sensitivity to factors such as economic growth and inflation and their vulnerability to operational challenges should be more important than how they align with some prescribed taxonomy. In this article, I take each of the classic metrics covered in the LaSalle chart and address why a change of mind-set may lead to better core portfolios.