Value-Add as Exclusively an Operational Problem?

Question

I am seeking perspective from folks who have invested in various types of commercial properties (or multi). My entire real estate career has been in senior housing, so my investing lens has been shaped by a single niche.

Something we frequently encounter, and actively seek, in senior housing is value-add deals that are in exceptional physical condition and in great markets. Senior housing is a difficult operating business, so deals will often sell at deep discounts exclusively due to the shortcomings of an in-place operator.

Conceptually a deal could be distressed for three reasons: (1) The physical plant is in poor shape; (2) the market is oversupplied or challenging in some other critical way; or (3) the operator (i.e, manager) is performing poorly so there is no cashflow. Often it's a combination.

The deals that get us most excited are discounted deals where the entire explanation is #3.  Strong building, strong market, bad operator. We replace the operator and capitalize the deal with plenty of cash to fund losses during the stabilization period, and we're off to the races.

How common is that in other types of CRE? Is this a circumstance that is unique to senior housing given its particular operational complexity? Or do other niches also see "value-add" where the problem has nothing to do with market or physical plant?

Cory Wake · Answer

Clear and helpful feedback. Thanks guys.

Dillon Clark · Answer

@Cory Wake

I don’t think this is unique to senior housing at all. In fact, I’m seeing the same operator-driven value-add show up in other operationally heavy asset classes like campgrounds, RV parks, and certain STR portfolios.

In those niches, the physical plant and market demand can be solid, but weak systems, poor guest experience, outdated pricing, or passive ownership crush cash flow. Simply professionalizing operations, tightening underwriting, and reinvesting in the experience can materially change performance without relying on market appreciation.

My takeaway has been that the more “business-like” the real estate becomes, the more often operator quality is the differentiator. Curious if you’ve seen similar parallels when evaluating hospitality-adjacent assets, or if senior housing still feels uniquely sensitive to management execution compared to others you’ve studied.

Bo Smith · Answer

Management-driven distress is huge in other asset classes too, especially stuff that's operations-heavy. I see it all the time in self-storage and car washes - great locations, solid buildings, but mom-and-pop operators who don't know how to market digitally or manage expenses. Even multifamily, you'll find deals where rent rolls are way below market just because the owner never raised rents or did basic tenant retention. The key is having systems to identify which type of distress you're actually looking at before you make an offer. Are you actively hunting for these operator-distressed deals or do they just come to you through your network?

Pierre Guirguis · Answer

I see this outside senior housing, but it’s rarer than people think once you pressure test it.

In small multifamily and mixed-use, a lot of deals get marketed as “bad operator” when there’s usually at least some embedded market or income issue once you dig in. True operator-only distress does exist, but it tends to show up in very specific situations.

The cleanest examples I’ve seen are long-time local owners with outdated management, weak rent enforcement, or no systems. Physically the asset is fine and the submarket works, but operations never scaled past mom-and-pop. Swap management, fix collections and expense control, and performance improves quickly.

Where it gets tricky is financing. Even when the problem is purely operational, lenders still underwrite off in-place income and trailing performance. So the value-add might be obvious operationally, but you still have to carry losses and accept tighter proceeds until the operator change shows up in the numbers.

Senior housing probably sees this more cleanly because the operating leverage is so extreme and the business itself is the product. In more traditional CRE, “operator-only” value-add exists, but it’s often overstated once underwriting reality is applied.

Evan Polaski · Answer

@Cory Wake, I would say the same issues arise in all property types.  I am focused on retail.

Ultimately, much like you, mismanaged assets that are otherwise solid, are the best value-add opportunities.  Physical condition is often second best, because it is easily solved.

But, oversupplied markets are near impossible to resolve.  We see this issue in many markets for office space.  More WFH combined with increased technology requiring less space per employee means many offices are struggling and will continue to struggle until the supply issue works itself out (conversion or demolision; or increased demand).  But the landlords have no real control over macro economic issues like oversupply.

Michael K Gallagher · Answer

I feel that there is likely something similar in most of the asset classes, the difference being I'd anticipate there are just fewer overall operators in senior living.  or is Hard to just "come in and start" I assume there is licensure there and barriers to entry to even be an operator.  Conversely if you have the money what's stopping someone from winning the lottery and buying a mixed us building.  my point being I anticipate there are likely other asset classes that have this type of distress, but there are simply more people able to snatch them up.  I'm purely speculating here though.