By Gary Richetelli
Even if you’re brand-new to the commercial real estate industry, you’ve probably heard of office space classes—the broad categories by which commercial offices are evaluated against one another.
Office space falls into one of three classes: Class A, Class B, and Class C.
Contrary to popular belief, these classes don’t hew to standardized definitions. There’s no national or international standard for Class A office space, for instance.
Rather, office space classifications are locally relative. Though Class A office space is always more desirable than Class B space, which is in turn more desirable than Class C space, each class is only as good as its cohort. Class A space in the Boston area looks very different from Class A space in Dallas, which looks very different from Class A space in Seattle or Salt Lake City or Grand Rapids, Michigan.
Amid all the relativity, is there anything we can say for sure about the three classes of office space?
Yes—and it’s required learning for novice commercial real estate investors looking to cut their chops in an overwhelming and often high-stakes field.
The ABCs: Basic Guidelines for Class A, B, and C Office Space
What’s in a class? Here’s an overview of the three major office space classifications:
- Class A: Class A office buildings are larger, newer, and better located than Class B and C buildings. They’re also more energy-efficient, secure, and amenity-rich. Older-construction Class A buildings have typically undergone extensive renovations in the recent past. Unsurprisingly, they command higher rents—and therefore have significantly higher income potential—than lower-class buildings.
- Class B: Class B buildings are older and not always in pristine condition, but they’re solidly constructed and fairly well-appointed. In desirable areas, it’s common for enterprising investors to retrofit existing Class B space to meet local Class A standards, rather than build new.
- Class C: Class C buildings are even older than Class B properties. They’re often inefficient and technologically out-of-date. They’re popular with bargain-hunting tenants and hands-off landlords. It’s rare to find Class C space in prime locations.
What To Look For in a Commercial Office Property
Irrespective of class, you’ll want to consider these factors as you evaluate commercial properties:
- Location: Location is (almost) everything. GPS makes it easy to get anywhere these days, but most tenants don’t want to send their clients to out-of-the-way office parks or back alleys. Millennial professionals love being in the thick of things too.
- Age: Tenant tastes and needs change over time. Older buildings typically aren’t configured for today’s collaborative, technology-driven white collar workplace.
- Building Size: Even large tenants are more flexible than they used to be, but blue-chip firms still prefer large buildings capable of housing whole departments or entire workforces. As a general rule, Class C buildings can’t support these types of tenants.
- Cost: Class A office buildings are highly sought-after. Not surprisingly, they’re expensive—and, when supply is tight, competitive. The upshot: better cash flow.
- Tenant Quality: Class A space attracts the most desirable tenants. Class B draws a mixed crowd. And Class C falls to those priced out of the higher two tiers. If tenant quality is a concern, plan accordingly.
Is the three-tiered classification system really the best way to categorize the amazing variety of office space? It certainly seems restrictive.
According to 42Floors, a popular commercial real estate education resource, the three-class system may at the very least be incomplete. In many markets, Class A office space can be further divided into two tiers—“regular” Class A and a much smaller, more exclusive “trophy building” category.
Like the three traditional classes of office space, the trophy building subclass is ill-defined. 42Floors describes trophy buildings as “cream of the crop buildings that are industry leaders in every respect—technology, architectural design, posh finishes, and environmental sustainability…[t]hese buildings are in the best locations and are the most exclusive.”
Trophy buildings typically live in central business districts, less commonly in highly desirable peripheral areas with upscale amenities and first-rate transportation infrastructure. Intangible factors, such as iconic stature or preeminent location, can play into the trophy designation as well. For instance, an impartial observer might not think that New York City’s Empire State Building is a “cream of the crop” building, but its status as one of the world’s most recognizable office buildings is an intangible benefit that adds tremendous (and hard-to-quantify) value.
What class(es) of office space does your commercial real estate investment strategy encompass? Or do you prefer to steer clear of commercial office space altogether?