Investors often define the quality and risk of certain investments by sorting them into different classes. In commercial real estate, in order to quickly and easily relate key details regarding a property, investors use three differentiators: Class A, Class B, and Class C.
It’s important to know what these classes are and what types of investments are typically associated with each of them so that you can purchase the investment that’s right for you — and, just as important, you’ll find it easier to sort through the types of properties you aren’t interested in pursuing.
Furthermore, you’ll be able to compare different properties in the same market area. That way, by narrowing down the specific target demographic that your investment will cater to, you’ll be able to better understand the potential risks and rewards of the investment.
In this article, we’ll define Class A, Class B, and Class C property so that you’re a better, more informed real estate investor.
Class A Property
Of the three, Class A property is the highest quality: it’s the newest and most recently updated, with state-of-the-art building materials and methods. Also, Class A property usually has the lowest risk. As a result, of course, it’s typically the most expensive.
When someone talks about Class A commercial property, you can picture a brand new high-rise in the middle of a financial district with prime access to expressways and mass transit. It’s built to impress, and, accordingly, it attracts premier clients.
Some defining features of Class A include:
- High rent prices
- Built in the past 15 years
- New HVAC
- Up-to-date security systems (cameras, motion sensors, gates)
- Security personnel
- Reliable, high-bandwidth WiFi
- Great public school systems
- High-quality waiting rooms
All in all, when it comes to Class A, think “highest quality.”
Class B Property
Class B Property is defined by many of the same features as Class A buildings, except they usually have more uniform and standard construction design with average materials and quality, and they might have some amount of deferred maintenance. Still, they’re usually located in prime areas, right outside of city centers or in suburbs.
They might not command the same high rents as Class A buildings, but they still deliver many of the same qualities. Furthermore, many Class B properties located in great areas can be remodeled into Class B+ or A properties, offering to investors a potential value-add opportunity that’s otherwise unavailable.
Some defining features of Class B Property include:
- Lower-income tenants
- Rent prices roughly on par with the market average for the area.
- Older but adequate HVAC and elevator systems possibly in need of upgrades in the near future
- Middling vacancy rates
- Likely between 15-30 years old
- Lower security (not 24/7)
- Appeals to a broader demographic than Class A, which focuses mostly on premier tenants
When you think of Class B property, you can think of many of the same qualities as Class A, except with a higher emphasis toward functionality and a (slightly) lower quality.
Class C Property
After hearing the definitions for Class A and Class B property, it might be tempting to think of Class C property as worn-out, with plenty of deferred maintenance.
And, for the most part, you’d be correct. Class C properties are usually over 20 years old and are located in less desirable areas. A property that was Class B ten years ago before a lackadaisical professional management company was hired. These properties need to be remodeled to bring them up to the current standards.
Some defining features of Class C Property include:
- Low rental rates
- Less desirable location
- Outdated systems in need of repair
- Older than 20-30 years old
- Below-average quality building materials and finishes
Generally, when you think of Class C property, you can think of a property that’s in need of some fixing up here and there.
A Note on the Different Classes
There is no one universally accepted formula for the different classes. It’s possible that, through expert maintenance and renovation, a 20-year-old building is considered “Class A.” An uninformed amateur realtor might talk about a “Class A” office building when, in reality, it’s more like a Class B or even Class C.
The classes are not set in stone. They’re an unwritten rule for investors to easily relay information about a certain property to other investors and interested parties. So, just because someone says a property is a particular class doesn’t necessarily mean that it is, in fact, that class. Always be sure to do your due diligence so that your investments line up with your priorities.
Conclusion: Why does this matter for you as an investor?
Class A property has the highest quality. These buildings have all of the amenities you could want and more: they’re located in a great area, built with state-of-the-art materials and methods, and, for those reasons, they attract the highest-income tenants. Of the three classes, they’re also the lowest risk — but also the lowest potential reward. This can be a good fit for investors looking for capital preservation. On the other hand, Class A can also be especially sensitive when tenants lose their jobs, like in a recession. When maintaining your building depends heavily on high-income tenants, it can become untenable to maintain if you lose those high-income tenants.
Class B shares many of the same properties as Class A, except it might be a slightly older age with more of a focus on functionality. Class B property offers some opportunity for value-add. If you can buy a Class B in a good area, you can potentially remodel it into a Class B+ or A.
Class C is usually in need of fixing up. Systems might be outdated and the building materials and methods might be poor. There’s likely some sort of deferred maintenance, but these properties also offer opportunities for value-add investments.
Keep in mind, though, that while Class B and C investments are typically riskier than Class A, they offer the potential for a greater reward through fixing up the property and lowering vacancy rates.
Thank you for taking the time to read this
If you enjoyed reading this blog post, I’d love for you to subscribe to our monthly newsletter or share it with a friend!