Operational real estate is increasingly on investors’ radars, but it often remains misunderstood. If you are used to traditional commercial real estate, operational assets seem complex, intimidating, and challenging to navigate.

There may be a temptation to eschew opportunities in operational real estate. After all, operational real estate investments often appear riskier. They can be relatively illiquid, and the income streams they provide can be less predictable and less secure.

However, adding operational real estate to a diversified portfolio can bring significant advantages. For those ready to adapt and grow, operational real estate is an opportunity, not a threat. If you have not already, it is time to assess operational real estate as a strategic investment option.

What Is Operational Real Estate?

So, what exactly is operational real estate? Essentially, these are assets where value creation isn’t just about physical space—it’s about actively managing the property and the business that runs on it. Unlike traditional real estate, which relies mainly on leasing space, operational real estate generates income through both leasing and services. Consider hotels, senior housing, student accommodation, co-working spaces, and self-storage facilities. The list is lengthening as the experience-focused economy grows.

This isn’t your typical “set it and forget it” real estate. It involves active, day-to-day management, making it more hands-on and responsive to market dynamics. Typically, returns are directly tied to the performance of the business operating from the property, not just a fixed lease agreement.

Why Should You Consider Operational Real Estate?

Adding operational real estate to your portfolio can bring a lot of benefits. Let’s explore why it could boost the risk-adjusted performance of your strategy.

1. Higher Yield Potential

Operational real estate often brings in significantly higher yields than more passive assets. For instance, multifamily properties with managed services or hotels with premium amenities can achieve much higher income per square foot. By integrating value-added services, like concierge amenities or co-living experiences, you can tap into the growing consumer demand for convenience and unique experiences, boosting your returns.

Operational real estate often requires specialized knowledge, relationships, and management capabilities, which can create a higher barrier to entry for potential competitors. As an early mover or knowledgeable player, you can gain a competitive advantage by developing or acquiring the expertise required to operate these assets effectively. In some sectors, you can build a brand that further adds to the barriers to entry and, therefore, pricing power.

2. Inflation Resilience

Short-duration income has advantages, not least pricing flexibility. Operational real estate allows you to adjust pricing frequently—sometimes even daily or monthly. This adaptability makes it better equipped to deliver strong real returns during inflationary periods. When costs go up, you can adjust your pricing accordingly, preserving income levels in ways that traditional leases can’t match. The current environment of heightened inflation volatility makes it a good time to consider adding operational real estate to a portfolio.

3. Diversification of Revenue Streams

Unlike traditional real estate, where you rely heavily on rent from a limited number of tenants, operational real estate offers multiple revenue streams—lease income combined with revenue from value-added services. Adding operational real estate to a portfolio can reduce concentration risk and mean income is less driven by factors other than the demand and supply for space. It can help you achieve a more stable income profile.

4. Active Value Creation and Control

Operational real estate also allows you to approach value creation proactively. You can drive Net Operating Income by optimizing services, improving operational efficiency, or enhancing the customer experience. You don’t often get this control with traditional real estate, where income is mainly at the mercy of market conditions and lease terms. Control may be significant to investors seeking alignment with ESG commitments or impact investing goals.

5. Meeting Today’s Consumer Demands

Meet consumers where they are. Today, people want experiences, flexibility, and convenience. Operational real estate—like co-living spaces, senior housing, or build-to-rent communities—is perfectly positioned to meet these demands. Get the right side of this trend. Offer high-quality services and experience-driven amenities to set your property apart and ensure long-term growth.

What You Need to Succeed in Operational Real Estate

If you’re considering investing in operational real estate, you must understand that it requires skills different from traditional assets. Operational real estate is hands-on and requires deep involvement in running the associated business. Whether you use management contracts, franchises, or another hybrid model, operational expertise and business acumen are essential. You must be able to assess, nurture, and synergize with operator skills.

Successful investors in operational real estate must also be skilled at structuring partnerships to align incentives and have the foresight and flexibility to act at the leading edge of market shifts.

Furthermore, you need to be able to price operational investment opportunities correctly. Many traditional real estate investors must improve their financial modeling capabilities. You will need to undertake a granular analysis of cashflow variability, ensure that business risks are fully captured, and make option and scenario analysis an integral part of underwriting.

Embrace the opportunity

Sure, operational real estate can feel intimidating, particularly if you’re used to the relative predictability of long-term leases. Also, investing in operational real estate requires different skill sets. But the trend towards increased demand for operational assets is over a decade old, the required capabilities are attainable, and the advantages to portfolio performance are clear. It is time to rise to the challenge and embrace the opportunity.