What are Building Classes in Commercial Real Estate?
In commercial real estate, office buildings are typically placed in one of three categories; class A, class B, or class C. Each category delineates a different level of price, quality, and amenities. However, since real estate quality varies greatly from place to place, A, B, and C classifications are subjective, and can only be based on what's available in a specific, local area. For example, a Class A building in a mid-size city or suburban area might be a Class B building in a larger, urban market.
Class A Office Buildings
Class A office space comprises the newest and most state-of-the-art office buildings in the area. For example, most new high-rises in any city's financial district would be considered Class A properties. These buildings usually have high quality construction, great location, top-notch management and lots of visual appeal, a high parking ratio, state of the art HVAC systems, the latest in security and communications systems, and best-in-class amenities (such as cafes, beautiful lobbies, valet service, etc.). Class A buildings are also typically quite energy efficient. These buildings occupy the highest-price range in the area, and are often occupied by prestige clients, such as well-known law firms and banks. Due to this, Class A buildings are the most expensive, and often offer rents significantly above the market average for the area.
Class B Office Buildings
Often slightly older (usually between 10-20 years old), Class B office buildings have fair to good visual appeal, are somewhat well located, have a fair amount of on-site parking, functional HVAC systems, and decent quality management. Many Class B buildings are four stories or less, but they can still vary greatly in size. In many cases, Class B buildings can often be returned to Class A with renovations. Class B buidlngs are often occupied by mid-market clients, such as a smaller, local businesses. These buildings occupy the medium price range for the area.
Class C Office Buildings
Class C buildings are often much older (often 20+ years), need substantial rennovation or improvements, may have little to no parking, don't usually have elevators or central A/C, and are often located farther from desirable areas. A Class C building can sometimes be renovated to become a Class B building, but is unlikely to ever become Class A property due to its smaller size and less desirable location. Class C buildings are more likely to be occupied by small, family run business, or newer companies that cannot afford higher-quality space. Since Class C buildings occupy the lowest price point in the area, they typically offer below-market rents.
What else investors need to Know About Property Classes
While A, B, and C classifications most commonly apply to office buildings, they can also apply to other kinds of commercial and multifamily real estate projects, such as apartment buildings and retail properties. No matter the property type, Class B and C buildings are usually sold at higher cap rates to compensate for the fact that they will require more in repairs and maintenance (R&M) costs in order to remain marketable.