What is Class A, B, C and D in Commercial Real Estate?

April 20, 2020

Building class can be confusing even to experienced real estate investors and commercial brokers. Part of the reason is that building class varies from market to market and also between asset types.

Building classification can also be subjective and mean different things to different users. So, for some tenants or investors, a Class C building might offer a better overall value than Class A, depending on the business plan and investment strategy being executed.

Here’s an in-depth look at how building classification really works, and the differences between Class A, Class B, Class C, and Class D commercial real estate.

Why Class Matters In Commercial Real Estate

The Building Owners and Managers Association International (BOMA) has been setting the standards for classifying commercial buildings for over 100 years.1 The Association divides commercial buildings into three distinct classes:

BOMA general building classifications

  • Class A properties are the newest and most prestigious “trophy property” buildings with high-quality finishes and systems that command the highest rents in the area from the best tenants.

  • Class B properties are newer and well-maintained buildings with average or above-average finishes and systems that appeal to a wide range of tenants with at-market rents.

  • Class C properties are older buildings that are still functional, but often have deferred maintenance or are in need of updating and offer below-market rents to tenants seeking the most affordable rents.

What about Class D?

Class D technically isn’t a building class, at least according to BOMA.

However, it’s quite common to find property classified as D in some real estate markets. Class D buildings are usually the ones that have been sitting vacant for a long period of time, in less than desirable locations, and are in need of extensive renovation and capital repairs.

Building classes are in the eye of the beholder

BOMA also notes that building classes are subjective because they vary from market to market and even within different neighborhoods and submarkets of the same metro area. Building class also means different things to individual investors.

For example, an institutional investor like a life insurance company may only consider Class A+ or A for investment. On the other than, an investment group pursuing a value add strategy may focus only on Class B or Class C because of the potential upside created from updating and repositioning.

Office Building Classifications

Assigning classifications to office buildings helps investors to differentiate between alternative properties in the same neighborhood or submarket. Office building classes also provide commercial real estate leasing agents and brokers with a tool to use for reporting market data and justifying asking rents between seemingly similar buildings.

As JLL recently reported, Class A and A+ office space is becoming increasingly harder to find – and commanding higher rents – due to the rapidly growing demand from high-tech, creative, and life sciences tenants.2

One of the challenges with using office building classifications is that there’s no industry-wide formula for classifying an office property. For example, a Class A office building in Austin might very well be considered Class C in a prime office market like Manhattan.

That’s why the best way to use office building classes is when comparing properties in the same immediate area or submarket. With that in mind, here are some of the general factors that make an office building Class A+, Class A, Class B, or Class C.

Class A+ and Class A office

Rents are above market for the area and appeal to national credit tenants who often have building naming rights with long-term leases.

Finishes and systems are top quality and state-of-the-art. Buildings are well-known within the market, have consistently strong occupancy rates, and plentiful on-site amenities such as outdoor space, trendy restaurants, and concierge services.

Class A+ and A office buildings are highly sought after by institutional investors in the U.S. and internationally.

Class B office

Rents are at the market average for the area and appeal to a wide variety of tenants by offering a fair value for the neighborhood.

Finishes are above average for the submarket, and property is well maintained. Class B office buildings are normally 10 to 20 years old and do not compete with Class A property on price.

Class C office

Rents are below the market average and offer tenants functional space at a budget-friendly price.

Floorplans may be obsolescent, and property is often poorly maintained and lacks modern amenities such as plentiful parking, lobby, and a centralized heating and cooling system. Class C office buildings are normally 20 years or older.

Class D office

Class D isn’t generally a classification used for office buildings. But interestingly, the Atlanta Business Chronicle questioned at one point if building Class D and F office space made sense due to the rapidly rising Atlanta metro area office rents.3

Using property characteristics to rate office buildings

BOMA actually recommends not assigning a classification to specific office properties. However, in the real world, commercial brokers need to explain to their clients why one property leases for 10% more than another or costs $25 more per square foot to purchase.

Here are some of the general characteristics CRE practitioners can use to rate and compare individual office buildings to one another:

  • Geographic location within a specific area

  • Suburban vs. urban market

  • Primary vs. secondary vs. tertiary office market

  • Ease of access to mass transit and highways

  • On-site and nearby off-site amenities and common area amenities

  • Availability of parking and building parking ratio

  • Original construction date and date of major updating or improvements

  • Property size, load factor, and rentable vs. usable square footage

  • LEED certification4

  • Elevator systems, number, and capacity

  • Age of mechanical systems such as HVAC, plumbing, and electrical

  • Ceiling heights

Multifamily Property Classes and Types

The multifamily asset class can be wide-ranging and include everything from small one- and two-unit rentals to large apartment buildings. For commercial real estate purposes, investment-grade multifamily property can be divided into Class A, Class B, Class C, and Class D.

Class A multifamily

Rents are above market for the area and property can be found in urban central business districts, suburban centers, or special-use and mixed-use development districts.

Class A multifamily buildings offer tenants high-quality finishes and amenities. The property is newly built or has been extensively updated within the last 10 years.

Class B multifamily

Rents are at market for the area and property is located in ‘middle class’ or ‘working class’ neighborhoods.

Class B multifamily buildings have little deferred maintenance and offer appliances and property amenities that are one step below Class A. The property is normally less than 20 years old with more modern, good quality construction.

Class C multifamily

Rents are below the market average and property is located in marginal or up-and-coming gentrifying neighborhoods.

Class C multifamily buildings often have low tenant turnover due to affordable rents. The property is around 30 years old and may be in need of updating and upgrading of unit appliances and property amenities.

Class D multifamily

Rents are at the low end of the market and property is located in undesirable neighborhoods. Class D multifamily buildings often have a high number of tenants per unit and a high turnover rate due to evictions. The property is 30 years old or more with structure and mechanical systems nearing the end of their useful life.

Definition of apartment types

Freddie Mac also categorizes apartment buildings into six different types:5

  • High-rise apartment buildings have at least nine floors and at least one elevator

  • Mid-rise apartment buildings are usually located in urban areas and have multiple stories and at least one elevator

  • Garden-style apartment buildings can be found in both urban and suburban areas, have three stories or less, may or may not have an elevator system, and are built in garden-like settings

  • Walk-up apartments are found in urban areas, have between four and six stories, and do not have an elevator

  • Manufactured housing communities are normally found in the outlying parts of secondary and tertiary markets, but sometimes in urban infill locations, where tenants provide their own manufactured home on a ground lease from the owner-operator

  • Special-purpose housing targets a specific tenant demographic and includes student housing, senior housing and assisted living, coliving, workforce and subsidized housing

Understanding multifamily investments

There are various pros and cons to each multifamily asset class that have a direct effect on investor demand, transaction volume, and ease of financing.6

Class A and Class B major market property see consistently strong demand from institutional investors such as life insurance companies, pension and hedge funds, and REITs. A variety of financing options are available, with higher leverage and lower interest rates. Cap rates range on the low end of the market for multifamily product.

Class B and Class C multifamily see the strongest investment demand from special-purpose REITS, crowdfunds, and some institutional investors. Financing is more limited, with slightly higher rates and balloon terms, with both non-recourse and recourse loans. Cap rates range in the middle of the market for multifamily product.

Class C and Class D multifamily are attractive to private investors, crowdfunds and smaller limited partnerships or joint ventures. Financing options are limited, with variable interest rates higher than Class A or B, with personal recourse on the loans. Cap rates are at the high end of the market for the multifamily product, reflecting both the increased risk and potential reward of Class C and Class D multifamily apartment property.

Retail Classifications, Product Types and Characteristics

Unlike the office and multifamily asset classes, retail investment property is classified by product type instead of class, according to the International Council of Shopping Centers (ICSC).7

There are a couple of reasons why retail assets aren’t generally classified as A, B, C and D. First, retail assets come in different types, shapes and sizes depending on the trade area being served. Demographics of the community also play a part in determining which retail product type will best serve the population of the trade area.

Retail trade areas

Trade area is the geographic area that the majority of the retail property’s sales come from.

In urban environments trade areas could consist of only a few densely-populated city blocks with borders based on highways or rivers and parks. Rural or suburban trade areas are usually much larger and are defined by travel time and distance rather than physical borders.

Retail demographics

The demographics within the trade area determine what type of retail product will be serve the population and provide the highest return to the investor. In the same way that geography determines if a market will be primary or secondary, demographics determines the destiny of retail.

For example, there are very few high-income areas that can support world-class shopping and luxury retail stores such as Intersect by Lexus in New York’s Meatpacking District or luxury consignment e-commerce brand RealReal’s second storefront in Los Angeles.8

On the other hand, there’s much larger demographic base across the country to support multiple Walgreens, McDonalds, and Whole Foods supermarkets.

U.S. shopping center classifications and typical characteristics

The International Council of Shopping Centers provides 10 different classifications for retail property in the U.S.:

1. Super-Regional Mall: 800,000+ square feet gross leasing area (GLA) on 60-120 acres with 3+ anchor tenants. Typical anchors account for between 50%-70% of the GLA and include full-line department stores and mass merchants, entertainment attractions, and food and beverage clusters. Trade area size ranges from 5-25 miles.

2. Regional Mall: 400,000-800,000 square feet GLA on 40-100 acres with 2+ anchor tenants and between 40-80 tenants in total. Typical anchors account for 40%-100% of the GLA and include retailers with general merchandise, fashion-oriented or entertainment offerings with inward-facing store fronts in an enclosed mall. Trade area size ranges from 5-15 miles.

3. Power Center: 250,000-600,000 square feet GLA on 25-80 acres with 3+ anchor tenants that account for 70%-90% of the GLA. Typical anchors include “category killers” like warehouse clubs and home improvement stores. Trade area size is 5-10 miles.

4. Lifestyle: 150,000-500,000 square feet GLA on 10-40 acres with 0-2 anchor tenants that account for up to 50% of the GLA. Typical anchors are large-format upscale retailers such as national-chain specialty stores with dining and entertainment options in an outdoor setting. Trade area size is 8-12 miles.

5. Factory Outlet: 50,000-400,000 square feet GLA on 10-50 acres with no anchor tenant. Typical tenants include manufacturers’ and retailers’ outlet stores selling brand-name goods at a discount. Trade area size is 25-75 miles.

6. Community Center: 125,000-400,000 square feet GLA on 10-40 acres with 2+ anchor tenants and between 15-40 tenants in total. Typical anchors account for 40%-60% of the GLA and include discount stores, supermarkets, and home improvement offerings. Building configuration is either straight line, L or U shaped depending on the site. Trade area size ranges from 3-6 miles.

7. Airport Retail: 75,000-300,000 square feet GLA with no anchor tenant. Stores are located within a commercial airport and provide specialty and restaurant services. Trade area is based on the volume of passengers transiting through the airport terminal.

8. Theme/Festival: 80,000-250,000 square feet GLA on 5-20 acres with no defined anchor tenant.  Typical tenants provide tourist, retail, and service-oriented offerings with entertainment as a unifying theme. Property is usually located in urban areas and may be part of a larger mixed-use project. Trade area size is 25-75 miles.

9. Neighborhood Center: 30,000-125,000 square feet GLA on 3-5 acres with 1+ anchor tenants and between 5-20 tenants in total. Typical anchors account for 30%-50% of the GLA and are usually supermarkets. Trade area size is about 3 miles.

10. Strip/Convenience: 30,000 square feet GLA on less than 3 acres with a small convenience store as an anchor or no anchor tenant. Tenants provide a variety of goods and services to the local community in a trade area of less than 1 mile.

Net-lease single-tenant pad

Pads are out-parcels that can be found in all types of shopping centers and malls. Free standing buildings are erected on out-parcel pads and leased to national credit tenants on single, double, or NNN leases.

Typical pad tenants include bank branches, drug stores, fast food outlets, auto shops, drive-up ATM or cash station locations, and even water refilling kiosks. Shopping center developers and investors use net-leased pads to improve investment returns with stable, long-term income and limited property management and owner responsibilities.

Industrial Property Types and Classes

Industrial property is normally found outside of the central business district. Buildings run the gamut from small single-tenant low-rise property to buildings grouped into a larger industrial park. Property is used for industrial purposes like manufacturing, research and technology, and distribution and is located near major road, air, rail and waterway transportation systems.

Two of the largest industrial parks in the U.S. include the 6-square-mile Elk Grove Village Industrial Park (including the new $1 billion Elk Grove Technology Park) in the O’Hare industrial submarket of Chicago, and the nearly 11-square-mile Research Triangle Park located between Chapel Hill, Durham, and Raleigh, North Carolina.9,10,11

Class A industrial

Rents are above the market average and property is new, high-quality construction with state-of-the-art systems. Class A industrial property often offers on-site amenities such as fitness and restaurant facilities, and ample parking. Features include high-speed fiber optic internet, LEED certified HVAC and mechanical systems, LED lighting, and 24/7 security.

Class B industrial

Rents are at the market average and property is slightly older than Class A. Class B industrial property is well maintained and offers a fair range of finishes to a wide variety of users with a focus on function over form.

Class C industrial

Rents are below the market average and property is older and may be out of date for some tenant uses. Class C industrial property may have unreliable internet connections, with mechanical systems such as HVAC, electrical, and plumbing in need of major updating. While nearly all Class A industrial and most Class B are designed for a ‘flexible ratio’ between office and warehouse space, the floorplan of Class C industrial space can be expensive to change.

Different types of industrial property

NAIOP (National Association of Industrial and Office Properties) is a leading organization commercial real estate brokers, developers, and investors in office, industrial, and mixed-use real estate.12

The Association lists the main types of industrial property and subclasses within each category:

1. Manufacturing

  • Large heavy manufacturing facilities with hundreds of thousands of square feet of space, loading docks, and plenty of space for heavy equipment and customized machinery.

  • Light assembly manufacturing buildings are smaller and size and are the final step in the production process where products are assembled before being shipped to consumers or business end users.

Manufacturing property normally has less than 20% of the total square footage used for office space.

2. Storage and distribution

  • Distribution warehouses are used to store goods before shipping and will vary in size, in some cases exceeding 1 million square feet of space such as Amazon’s most massive warehouse and high-tech fulfillment facilities.13

  • General purpose warehouses used mainly for storing parts or products, including cold storage facilities equipped with freezers to store perishable foods.

  • Truck terminals have very little storage space and are designed for primarily for transloading items from one truck to another.

The amount of square footage used for office space in storage and distribution buildings can vary widely depending on the property type. But as a rule of thumb, about 20% of the total space is configured for office use.

3. Flex space

  • Research and development (R&D) are often built to meet the specifications of a specific tenant or use, such as Google’s self-driving car facility in the Detroit metropolitan area.14

  • Data centers house equipment the keeps the internet running, data safe and secure, provides the backbone for cloud storage such as AWS (Amazon Web Services) and is one of the fastest-growing specialty commercial real estate investment classes.15

  • Showrooms typically have a mix of office, warehouse, and showroom floor space dedicated to showing and selling products to the trade or general public, such as the 41,000 square foot market center for Hyundai’s luxury car brand Genesis on the ground floor of the Solar Carve Tower at 40 Tenth Avenue in Manhattan.16

How To Use Building Class To Your Advantage

Building class provides a way of comparing the pros and cons – and potential upsides – of two or more properties in the same area to one another.

That’s why using the search bar on CREXi is such a powerful tool to use to filter property by building class. Users can quickly zero in only on the buildings that offer the targeted risk and reward profile.

Locating properties in a specific class lets owners find buildings to meet their investment goals, and tenants find space that best matches their business plan and image.

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