Understanding Commercial Real Estate Classifications: Investment Grade to Class A, B, and C Properties
In the world of commercial real estate, buildings are categorized into various classes to help investors, tenants, and stakeholders understand their quality, features, and market positioning. These classifications provide a way, sometime subjective, to assess and compare properties. This post explores international and metropolitan-based classifications of commercial properties, highlighting the distinctions between investment grade, institutional grade, speculative grade, and metropolitan classes – Class A, Class B, and Class C.
International Classification
Investment Grade
Investment grade buildings are located in cosmopolitan markets and built to the highest standards in terms of systems, finishes, amenities, and tenant accommodations. These buildings lead the way in their sectors and are distinguished by their exceptional location, unique tenant profiles, and superior building management. Their systems—structural, mechanical, electrical, envelope, or interior construction—are at the pinnacle of their field.
Prominent metropolitan markets where investment grade properties can be found include Tokyo (Japan), Seoul (South Korea), Shanghai and Beijing (China), London (UK), Paris (France), New York, Los Angeles, and Chicago (US), Sydney (Australia), and São Paulo (Brazil).
Institutional Grade
Institutional grade buildings are large structures housing a stable tenant base, typically located in secondary metropolitan areas. These properties are generally large and substantial, making them attractive to institutional investors like pension funds and Real Estate Investment Trusts (REITs). In the development cycle, these are considered mature properties, featuring long-term leases with reliable tenants and professional property management.
Speculative Grade
The Oxford Dictionary defines "speculative" as "engaged in, expressing, or based on conjecture rather than knowledge." Speculative grade properties are developed to meet current market trends and functional needs, with the expectation of future market improvements. These buildings are usually designed to accommodate multiple tenants and prioritize functionality over exceptional design and finishes.
Metropolitan-Based Classification
Class A Properties
Class A properties are the newest and most prestigious buildings, located in prime areas and attracting top-tier tenants. These properties feature high-end finishes and advanced systems, providing excellent access to business centers, transportation, and amenities. They typically command the highest rents in the market and are usually less than 10 years old. Managed to the highest industry standards, Class A buildings offer on-site security, advanced HVAC systems, air quality management, proactive maintenance, tenant coordination, and dedicated tenant services.
Class B Properties
Class B properties are well-maintained buildings, typically located in good but slightly less central areas, and attract a broad range of tenants. These properties feature solid finishes and offer market-rate rents. Aged between 10 and 30 years, Class B buildings are managed to meet minimum required standards. They may not have on-site staff but receive regular maintenance to ensure their functionality and appeal.
Class C Properties
Class C properties are older and functional buildings that may require updates. They are commonly found in less desirable locations or secondary markets and offer below-market rents to budget-conscious tenants. Maintenance is often neglected, and if not upgraded, these properties may soon fall into the Class D category.
Class D Properties
Class D properties are very old, typically over 50 years, and are often in poor condition, located in less sought-after or declining areas. They attract tenants primarily focused on low-cost rents.
Class A standards represent the benchmark for other building classes. Although these classifications originated with office buildings, they are now applied to all types of commercial real estate. Thus, you may encounter terms like Class A office buildings or Class A industrial buildings. Additionally, even within prime locations, investors and tenants differentiate between various classes of buildings, acknowledging that some areas are more prime than others. As such, you might also encounter terms like AAA and AA buildings.
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References:
· Wikipedia. "List of Metropolitan Areas by GDP Over US$100 Billion." Last modified September 4, 2024. https://en.wikipedia.org/wiki/List_of_metropolitan_areas_by_GDP_over_US$100_billion.
· Building Owners and Managers Association (BOMA). "Building Class Definitions." Accessed September 5, 2024. https://www.boma.org/BOMA/Research-Resources/Industry_Resources/BuildingClassDefinitions.aspx.
· BOMA Quebec. Office Building Classification Guide. 2014.