For investors, it pays to have a diverse portfolio of investments, especially when it comes to commercial real estate. However, understanding the differences that make up that diversity can be tricky.
The size of a city often matters as much as the size of the actual building you are considering.
However, while it can be tricky to figure out correctly which CRE (commercial real estate) properties are right for you, there is, fortunately, a common methodology used to describe each classification, A, B, or C, to help you distinguish among them.
Office Building Classifications
The first distinction to make clear in this discussion is that we are determining classification levels for office buildings only. There are four types of commercial real estate in all – office, industrial, retail, and multifamily, but there can also be a crossover. Some buildings will have mixed uses, with retail on the bottom floors and multifamily spaces on higher floors.
In general, however, office buildings are pretty exclusively made up of offices, sometimes including retail businesses, but not usually including industrial (meaning warehouses or logistics facilities) or multifamily spaces (apartments or condominiums) which often stand alone.
To that end, the classifications below pretty strictly adhere to office and retail spaces.
You will note these classifications are based primarily on quality, with A being the highest.
Class A buildings tend to be newer buildings with top quality materials and the latest technological innovations. They are often less than 10 years old and are located in Central Business Districts; their locations are highly visible and in higher rent and lease areas.
Class A properties have luxury finishes, are usually energy efficient, in excellent condition, and don’t require renovations other than those done for style and use. You can also expect amenities packages that include things like gyms, daycare centers, dining options, private outdoor space, security, and valet and concierge services.
Class A tends to have the highest sales price but also offers the lowest risk in terms of investment.
Class B is the middle range of commercial investment properties, and one of the things that makes them great investments is that with enough renovation and attention, they can often be upgraded to Class A properties.
Class B office spaces are well-located in solid markets but may be just outside the central business district. The amenities and finishes are strong and functional but not worn down or in disrepair.
Class B tenants tend to prefer function over form and don’t need to be right in the middle of the action. You can expect amenities that include on-site parking and bike storage, cafe dining, and shared outdoor spaces, as well as conference rooms.
Investors can rely on a lower price than they would get for Class B and a mix of price appreciation and income.
Finally, Class C properties are the older, more vintage spaces that need moderate to significant repairs. They are 20 years or older, and are located in less desirable, lower income areas. The amenities in Class C buildings are either nonexistent, outdated, or non-functional.
Buildings in this class often charge lower rents, house businesses with hourly workers, and smaller, family-owned businesses.
Class C offers lower sales prices than Class B and a higher level of risk due to the danger of damage or destruction that can become a serious liability. In terms of investment value, they may be a worthy risk to take for an up-and-coming neighborhood or district when the investor is prepared to perform numerous renovations.
Why Classification Matters
In the end, understanding building classifications can help give investors insight into the investment they are making at a snapshot level. Of course, you will want to get full context in the larger picture before making a final decision.
That’s where working with a knowledgeable commercial real estate professional comes into play to help you make the most informed decisions for your business or investment property.