The ABC’s of CRE: What You Need to Know About Commercial Property Classifications

by Mike Kushner, CCIM

You are likely aware that there are different classifications of commercial space – specifically Class A, Class B, and Class C. But what qualities determine the commercial property classifications? Is it the location, the layout, the finishes, or the amenities?

The answer is that it actually includes all of these things! The classification of property is very important to keep in mind both as a real estate investor or as a business tenant. Your budget and use of the space will help to determine the property class best suited for your needs. Here’s an overview of the pros and cons of each classification to kickstart your understanding.

Class A

Overview: As you might expect, Class A office space is considered extremely desirable investment-grade properties and command the highest rents or sale prices compared to other buildings in the same market. These buildings are in prime locations with efficient tenant layouts that function as excellently as they look. Some Class A office space is an architectural or historical landmark designed by prominent architects. Simply put, Class A office space is for the renter or investor who wants the highest level of quality and convenience and is willing to pay a premium for it.

Pros: With Class A office space, you know you’re getting the best – the best location, layout, finishes, and amenities. You are likely to have other desirable businesses as your “neighbors” in the same building, which can increase the value of your space. You can also rest assured knowing that the space will be well-maintained, meaning less headaches or inconveniences for you in the long run.

Cons: This class of space comes with the highest rent or sale prices. You may also have less negotiating power since the space you’re getting is usually in top condition with every advantage on its side to drive the price high – including many other businesses who are eager to jump on the space if you don’t.

Class B

Overview: Class B office space is a step down from Class A space in its location, design, quality, and amenities. As such, this space carries a lower price tag. Class B buildings offer utilitarian space without special attractions and have “ordinary” design as compared to Class A. These buildings typically have average to good maintenance, management, and tenants. They are less appealing to tenants than Class A properties, and may be deficient in a number of respects including floor plans, condition, and facilities. They lack renown and must depend chiefly on a lower price to attract tenants and investors.

Pros: Since Class B office space is “middle of the road”, you have the advantage of getting a better work environment than Class C, for a price that’s less expensive than Class A. As an owner or investor of Class B space, you’re likely to find many tenants whose budget and expectations align best with your space.

Cons: On the flip side, Class B space has several drawbacks to consider for the cost savings. It’s not likely to be in a prime location where Class A properties are found, nor will it have the same amenities and quality of finishes. You may find the layout to be less convenient and the building and its other tenants to be “less prestigious” than Class A.

Class C

Overview: Class C office space describes buildings that generally qualify as no-frills, older buildings that offer basic space and command the lowest rents or sale prices compared to other buildings in the same market. Such buildings typically have below-average maintenance and management, and could have mixed or low tenant prestige. Things like inferior elevators, mechanical, and electrical systems help reduce the cost, but also increase the possible headaches for tenants. These buildings lack esteem and must depend chiefly on a low price to attract tenants and investors.

Pros: The biggest benefit of Class C office space is its low price in comparison to Class A & B. If you’re looking for a simple and understated work space with zero frills, Class C might be a great option to help you stick within your budget while still getting all the space you need to grow your business.

Cons: When looking at Class C space, you need to keep your expectations in check. This is the lowest of the classes and likely to be the least desirable in condition as well. There may be things that need obvious repair, the building and its location may leave a lot to be desired, and your neighboring tenants are not likely to be renowned businesses. Having said that, sometimes you can get lucky and find a Class C space in an area that has “good bones” and a lot to offer the right business. It’s always important to keep an open mind, especially when working with a limited budget.

The classes of office space each have something to offer, and each is right for a different type of business. Whether you want the high-profile allure of a Class A building, the straightforward and affordable benefits of a Class B property, or the budget-friendly simplicity of a Class C space – there is something for everyone in the local market.

Contact our advisors today to get started on finding the right building, in the right class, for your business.

This article was originally published on the Omni Realty Group website by Mike Kushner, CCIM. Omni was an exclusive buyer agent/tenant rep commercial real estate firm owned by Mr. Kushner prior to his joining the Capstone Commercial team. It has been adapted and reposted with permission. See the original article here.

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