Cornerstone real estate investments refer to acquiring and holding high-quality, core assets for the long term. These types of properties are considered the foundation or ‘cornerstone’ of a real estate portfolio due to their ability to provide stable, consistent returns over time. Cornerstone assets are desirable for several reasons: they tend to be located in major metropolitan areas with high barriers to entry; they benefit from high occupancy and retention rates; and they have creditworthy tenants on long-term leases. As such, cornerstone properties generate reliable cash flows even during economic downturns. While they offer lower risk-adjusted returns than opportunistic plays, cornerstone real estate delivers durable income streams with less volatility. Investors may choose to overweight cornerstone real estate in their portfolio for diversification, income stability and lower risk profile. Overall, cornerstone real estate investments provide a solid bedrock to build upon due to their fundamental value and competitive strengths.
Cornerstone assets provide steady cash flows
A key feature of cornerstone real estate investments is their ability to generate consistent cash flows over long periods of time. These properties tend to have high occupancies of 90% or greater due to their prime locations and reputable standing. Strong tenant demand enables owners to implement modest rent increases annually. Creditworthy tenants with investment-grade ratings also sign long-term leases of 10+ years in length. As a result, cash flows remain stable despite market fluctuations. Investors can expect reliable income from cornerstone assets to fund dividends and reinvestment activities. The cash flow stability contrasts with more opportunistic plays where income streams may be interrupted.
Cornerstone assets demonstrate resilience across cycles
Cornerstone real estate investments prove resilient across market cycles due to tenant demand. During recessions, occupancy may dip slightly but remains at healthy levels. Following downturns, core properties are quick to recover as tenants are reluctant to vacate. The high-quality locations and competitive advantages of cornerstone assets continue attracting tenants even when new construction stalls. While commercial property values may moderate in downturns, cornerstone real estate does not experience the same volatility as other assets. The defensive nature enables these properties to maintain fundamentals in the face of uncertainty.
Cornerstone assets carry lower risk than opportunistic plays
Compared to opportunistic real estate investing, cornerstone properties carry significantly lower risk. Whereas opportunistic plays target under-managed or distressed assets, cornerstone real estate consists of institutional-grade, irreplaceable properties in premium locations. The higher quality translates into lower vacancy, easier renewals, and expense optimization. Cornerstone assets also require less capital for leasing costs, tenant improvements and maintenance. The lower risk leads to lower return thresholds, making core real estate attractive for risk-averse investors. While opportunistic plays may generate higher returns, they involve more uncertainty and potential loss.
Cornerstone assets provide portfolio diversification
Cornerstone real estate delivers valuable diversification benefits within a broader investment portfolio. The durable yet moderate cash flows derived from cornerstone properties contrast with the volatility of stocks and other risk assets. Cornerstone real estate also exhibits low correlation to the public equity markets. The diversification it provides helps reduce overall portfolio risk and enhance risk-adjusted returns. Investors may choose to overweight allocations to cornerstone real estate for better balance between return objectives and risk mitigation.
In summary, cornerstone real estate investments like Class A office buildings and retail centers provide stable, durable returns over time. Their fundamental value, competitive strengths, creditworthy tenants and high-quality locations underpin their income and resilience across cycles. While delivering lower returns than opportunistic plays, cornerstone assets carry far less risk. Their income stability, diversification benefits and lower risk profile make cornerstone properties a strategic allocation for real estate investors.