Real Estate Investments: Stabilized vs. Value-Add

Part of the analysis of any commercial real estate transaction involves the categorization of the deal. From an investment standpoint, real estate deals can sometimes be defined as either stabilized or value add.

Part of the analysis of any commercial real estate transaction involves the categorization of the deal. From an investment standpoint, real estate deals can sometimes be defined as either stabilized or value add.

But the criteria for these categories can be subjective, and conditions can change in ways that move a deal from one category to the next.

So let’s get clear on the factors that play into each definition.

Stabilized or value add?

The occupancy rates of a commercial real estate asset play a big role in determining whether a deal is stabilized or value add.

Stabilized assets typically have at least 80% occupancy, usually at market rental rates. These deals are usually steadier and lower-risk transactions.

Generally, value add assets will have occupancy that is either below 75% occupancy at market rates or above 75% occupancy at significantly below market rates. These deals are higher risk, but they hold the potential for higher returns.

Value add assets call for improvement to increase occupancy rates, whether that means upgrading the condition of the building, refreshing the interior space, or fixing other aspects of the property.

Gray area

So how do you determine the category of a deal?

Don’t rely on the slapped-on labels within the slick marketing packages from sponsors or brokers. These categories are gray areas with loose definitions and evolving conditions.

For example, market rates can significantly change over a period of a year. Sometimes an asset will be marketed as a true value add deal; this means that you need to get occupancy up by a precipitous amount.

Other times, a stabilized deal still has a value add component. Even though the deal isn’t defined as a value add, there is some “meat on the bone” that offers additional upside. Perhaps you could take the deal from a stabilized asset at 85% occupancy to 95% or 100% occupancy. Or you could improve the market rates for that property by doing value add work.

Which is better?

In commercial real estate, there is no single “best” choice between value add or stabilized deals.

At Excelsior, we pursue both kinds of deals. It all depends upon the attractiveness of the asset and whether we think the story behind it makes sense.

As you assess each transaction, your job is to ask the right questions.

If a deal is marketed as value add, get clear on the condition of the building.

  • Are there many required repairs to perform at closing?
  • Does the building need significant capital expenditures to make it attractive to potential tenants?
  • Is the future value a function of leasing, where you just need to get occupancy up? Or is there a substantial gap in the in-place vs. market rents?
  • If a tenant leaves, does their space need significant tenant improvement dollars, or is it in good shape?

When a deal is marketed as stabilized, you need to understand the level of the occupancy and current weighted value of the rental rates and lease terms. 

  • What are the current variables?
  • For example, if the asset is at 85% occupancy, what is the market rental rate as compared to what is standard? How long are the leases that are in place? (Learn more about rent rolls here.)
  • A perfect clear-cut example of stabilization would be a 95% occupancy rate, with all leases expiring in 3+ years.
    – In this example, there is minimal work to be done.
  • Other stabilized deals might have leases that expire in the next 12-24 months. If so, there is a certain amount of risk in that deal.
    – It could almost be construed as a value add because you will be doing a lot of work in the first year or two.

The bottom line is that you need to do your own homework to define any deal. Above all, you need to clarify the risk tolerance profile for your transaction.

Parse through how a deal is marketed, clarify the criteria that you need to assess, and thoroughly analyze the information that is provided. This level of due diligence will allow you to make smart decisions about an opportunity and whether it makes sense for you.

Previous Articles


The Ultimate Guide to Commercial Real Estate Investing

Learn everything you need to know to assess the benefits of a commercial real estate investment and make the best decisions to get started.

Real Estate Accounting Fundamentals

Real Estate Accounting Fundamentals

Real estate accounting plays a crucial role in the financial management of investment properties, and it’s important to be aware of…

Navigating Investments In An Election Year, Strategies for Consideration

Navigating Investments In An Election Year, Strategies for Consideration

Investing during an election year can feel like a daunting prospect, given the uncertainties and apprehensions that often accompany political transitions.


Embracing Distressed Opportunities in Today’s Commercial Real Estate Environment

A myriad of formidable obstacles has opened up innovative pathways to success.

The Benefits of Infrared Saunas, Red Light Therapy & Cold Plunges

Join us as we sit down with Kristen Nicholson, entrepreneur and owner of Nashville’s first contrast therapy studio, Urban Sweat. Kristen is a healthcare professional with a background in health administration…

Why It Feels Impossible to Keep Up in Today’s Society

In this episode, host Brian Adams sits down with COO Jarrod Arnold to discuss the disconnect between the financial perceptions and realities facing younger generations today.

How Businesses Thrive and Grow in the Modern Age

Brian Adams is joined by Sarah Johal, co-founder of Parents in Tech Alliance, who highlights the harsh realities caregivers face in the workplace. From discrimination to lack of support, we learn how 75% of the workforce provides care, yet leaders fail to track this untapped talent pool losing billions annually.

Geopolitical Risk Considerations: The Biden Administration and U.S. Foreign Policy Challenges

Zack Cooper, senior fellow at the American Enterprise Institute and lecturer at Princeton University, joins us for an engaging discussion about geopolitical issues today.

Are We Nearing a Period of Stagflation?

Are We Nearing a Period of Stagflation?

The current economic landscape bears a striking resemblance to the 1970s and we may be entering a new era of stagflationary instability…

Excelsior Capital

A real estate private equity firm that owns and operates high quality multi-tenant office assets in emerging secondary markets.

Interested in learning more about Excelsior's investment opportunities?

Excelsior Capital

104 Woodmont Blvd, Suite 120
Nashville, TN 37205

Disclaimer: Under no circumstances should any information presented on this website be construed as an offer to sell, or solicitation of an offer to purchase any securities or other investments. This website does not contain the information that an investor should consider or evaluate to make a potential investment. Other materials related to investments in entities managed by Excelsior Capital are not available to the general public.