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One of commercial real estate’s most complicated and contentious issues is the differences between property classes. Building classification can be confusing despite being a crucial aspect of urban development.
The Building Owners and Managers Association International (BOMA) established three classes to categorize the quality of multi-family, office, retail, and industrial buildings: Class A, Class B, and Class C. Realtors, regional administrators, and appraisers use BOMA’s standards when determining the value of a property, but those grades have no universal definition.
According to BOMA Philadelphia, the three classes “represent a subjective quality rating of buildings which indicates the competitive ability of each building to attract similar types of tenants.”
The vagueness surrounding property classes can make project development for complex projects very difficult because it’s time-consuming, expensive, and uncertain. Attempting to start a Class A project in the wrong area or at the wrong time is a recipe for disaster. However, having a good understanding of the topic can be instrumental in overcoming those challenges.
Here’s everything you need to know about commercial real estate property classes and insight on how to get a good building report card.
The Factors Used to Classify a Commercial Property
While no absolute rules govern property classes in the U.S., six factors generally determine a property’s relative value, investment risk, and potential returns.
The location of a building is the most significant factor in determining its worth. Before any other considerations, investors and tenants want to know where a property is based when assessing its merits. The status of the local job market, population, urban infrastructure, education system, tax rates, and climate are crucial in determining property classification.
For example, all of America’s major cities have grappled with an affordable housing crisis for several years. Still, some markets are much more desirable than others.
So, a new 300-unit multi-family complex would address the crisis regardless of location. But a property Class A building in Cleveland won't necessarily receive that classification in Los Angeles.
That said, the launch of a major capital project, like a new mass transit system, can be transformative. With greater transit access, an underdeveloped area can become an up-and-coming neighborhood in just a few years.
The second most significant factor used in commercial building classification is age. Older buildings generally have much less curb appeal than newer properties for most asset classes, but that can change. Over time, some properties regarded as culturally and architecturally significant become local landmarks that shape the character of their neighborhoods.
For example, New York’s 1500 Broadway is a Class A property despite being 51 years old because it's a cornerstone of Manhattan’s Times Square. The beloved office building, host of ABC’s Good Morning America since 1985, has become a world-renowned tourist attraction.
Similarly, properties with modern, well-maintained exteriors are graded higher than run-down structures with faded paint and damaged fixtures that require moderate to significant renovation. And buildings need a quality of maintenance to be considered Class A.
Architectural features like high ceilings, big lobbies, and energy-efficient HVAC systems that make properties more habitable play a big role in building classification.
In addition, green buildings with features like sustainable roofing and recycled building materials have enjoyed significant financial benefits because they meet federal environmental, social, and governance goals.
Properties with onsite amenities that make them comfortable, functional, and accessible make them more desirable. High-speed internet connectivity, air conditioning, fitness centers, conference rooms, and nearby parking make commercial properties more appealing to high-paying tenants.
Finally, properties occupied by well-capitalized tenants and residents with good credit are well-regarded because they provide consistent cash flow and high returns.
For developers, finding first-rate tenants is essential to maintaining a top-tier classification because empty buildings are poor earners. Traditionally, developers strive to launch new projects in premier locations with appealing features and amenities to entice prominent businesses and high-income renters.
The Four Commercial Real Estate Building Classes
What Makes Commercial Building a Class A Property?
Class A is the highest-ranked property class in commercial real estate. Only the best living spaces, offices, and facilities receive this grade because they are located in and around thriving business districts in major urban markets. Class A buildings feature beautiful exteriors with modern designs, first-class amenities, and state-of-the-art power and heating systems.
And they command the highest rents and attract high-earning and reputable tenants, making them good investments because of their low vacancies and steady cash flow.
Generally, the properties are less than 15 years old or have been through a major renovation.
However, it’s important to remember that building classifications are highly localized.
As Colliers points out, A Class A building in downtown Houston would include 250,000 square feet of space, but a suburban property would only need 50,000. But meeting local zoning regulations is only one item on a long checklist. Developers have to carefully consider what elements their project needs to appeal to prospective residents and tenants.
Windsor Stevens’ The Proctor is a prime example of a future Class A property in development.
The multi-family complex, set for delivery in 2024, will provide midtown Atlanta with 142 apartments and six live-work units. It features first-rate amenities like a fitness center, a dog spa, electric vehicle charging stations, and a three-level parking deck. The building will be a welcome addition to the Westside Trail area, a submarket with a 5.4% vacancy rate, and a local Microsoft Campus.
What Makes a Commercial Building a Class B Property?
Class B properties are aging commercial buildings in fair to good condition, with practical designs that were popular decades ago.
Typically, these properties aren't centrally located, need better lighting, and need more modern conveniences and amenities. They also lack features that appeal to contemporary preferences for technology-rich interiors and environment-friendly architecture.
Consequently, Class B buildings underperform financially and are riskier investments than Class A properties. But they make up for it with scenic views and easy access to local transportation hubs.
For example, Dallas’ Gateway Tower is a very fine Class B property. The 15-story general office, built in 1982, has 24/7 surveillance, sits near DFW airport and Love Field, and offers free garage parking. As another added benefit, the building gives tenants a great perspective on North Dallas.
But while mid-tier buildings aren’t appealing to young professionals and leading companies, they have an undeniable nostalgic appeal.
For example, Washington D.C.'s office market has over 300 underperforming commercial buildings. Due to economic and social factors, the area is unlikely to see a major revitalization like Manhattan or Phoenix. But industry leaders believe those dingy Class B and Class C commercial properties have untapped potential as residential conversions.
Over the next decade, well-informed developers can transform the District of Columbia into a thriving urban housing market.
What Makes a Commercial Building a Class C Property?
Lastly, Class C buildings are low-quality properties in undesirable locations that need significant rehabilitation. They feature worn-down, 30-year-old exteriors and need significant building improvements.
Class C properties are less accessible than Class A or B buildings because they aren't in main transit corridors. As a result, they are far from schools, shopping centers, and tourist attractions. And being disconnected from arts and entertainment districts means they don't benefit from the economic activity those areas cultivate. These are broken-down commercial buildings in regions with poor street maintenance and underfunded transport systems.
Because of those attributes, Class C properties garner below-market rents, struggle to maintain tenants, and don’t appeal to investors.
But like Class B buildings, these properties can become profitable investments, like Presidio Bay’s 436 Bryant Building.
The developer transformed a dilapidated, 100-year-old industrial building into a flourishing mixed-use complex with new seismic retrofitting, foundations, electrical and mechanical infrastructure, and a lobby featuring Indonesian timber cladding.
Thanks to significant capital investment and shrewd project planning, the renovated building became an in-demand property in San Francisco’s South Park neighborhood.
How Real Estate Developers Can Determine a Building’s Class
The lines separating Class A, B, and C properties are blurry because they vary from region to region.
Investing significant time, money, and care into a developing new apartment or office building doesn’t guarantee it will become a Class A property. Doing extensive research, assembling the right team, and connecting with investors are just laying the foundation. Getting all the little things right ensures successful project planning and assures prospective tenants feel good when they walk through the door.
Launching a new Class A building or rehabbing a Class C property requires a lot of detailed work. And even seasoned developers need help doing that, and one of the best things about working in real estate today is that help is available.
Instead of getting lost in mountains of spreadsheets and other planning documents, you can use proactive intelligence platforms to take command of your portfolio.
By centralizing all your project data, you bring all the big differences and subtle nuances that define Class A, Class B, and Class C properties into focus. Instead of second-guessing every choice, you can make data-driven decisions to produce better outcomes.
Once that happens, you’ll have the clarity to deliver a career-defining project delivery.
Want more guidance on how to deal with the industry’s biggest challenges? Download our A Guide to Overcoming Real Estate’s Greatest Obstacles eBook to get actionable insights you won’t find anywhere else.
Tag(s): Real Estate Development
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