Building Classes (A, B, C) – Everything You Need to KnowJuly 4, 2019
When someone refers to “primo office space” or a “roach-infested dungeon,” what do they mean, precisely? It is the job of building classifications to distinguish the quality of different properties. Commonly, we use building classifications in conjunction with office buildings. However, you can use them for retail, industrial, hotel and apartment properties, among others. The three office building classifications are Class A, Class B and Class C. In this article, we’ll reach for an understanding of the different office building classifications. Also, we’ll delve into building occupancy classifications and end with some frequently asked questions.
Office Building Classifications
The first thing to know is that office building classifications vary by market. That is, you classify buildings as Class B or Class C relative to Class A in a particular market. Thus, there are no absolute standards for the different office building classifications. However, various groups seek to make the classification system less subjective, including BOMA International, CoStar, and NAIOP While no consensus exists, we can describe the general characteristics of each building classification, which we do below.
Property class is an important consideration for investors, because each class has a unique risk/return tradeoff. Naturally, Class A properties can interest investors who are less willing to take risks. Class C properties sometimes attract risk-loving investors looking to make a superior return. By referring to buildings by class, lenders, brokers, landlords and investors can communicate more efficiently, which often saves time.
The building classifications encapsulate a myriad of building characteristics. Specifically, these include the property’s age, condition and location, its amenities and rental income. Also figuring into the mix are the tenant income levels, the area’s growth prospects, and the building’s appreciation potential.
What is Building Class A?
Class A, and its even higher-quality cousin, Class A+, represent the top-quality buildings in a market. Often, in a city’s business district, Class A buildings could easily exceed 250,000 square feet. Conversely, suburban buildings might offer 50,000+ square feet. Of course, they compete for premier tenants and boast the highest occupancy rates.
Characteristics of Building Class A
Class A buildings have the best looks, the finest construction and highest-quality infrastructure, fixtures, HVAC, elevators and high-tech systems. Also, they reside in the ritziest locations, offer superior access, are energy-efficient and benefit from professional management. Normally, Class A buildings went up in the last 10-15 years, have quality amenities and command top rents. However, older buildings of renown can be every bit as impressive as the newer ones.
Often, Class A amenities can include restaurants, concierge service, valet parking, fitness centers, daycare facilities, and retail stores. Notably, in suburban settings, you might come across Class A buildings with barbecue areas and lavish fountains. Additionally, you’ll often find high parking ratios, cutting-edge security systems, onsite bike storage, game rooms and roof terraces. Naturally, the rents will be higher than average for the city, and owners seldom grant tenant concessions.
Building Class A Is Synonymous with Quality
Frequently, Class A buildings are tall, with high ceilings and large ground-floor lobbies. Normally, these buildings are aesthetically pleasing and make a notable, high-visibility statement with eye-catching architecture. Notably, you are likely to encounter an indoor atrium with a restful water feature and verdant greenery. Clearly, elegant lobbies with mahogany accents, crystal chandeliers and imported marble surfaces are a perfect accent for these buildings. Furthermore, they suffer from few, if any, deferred maintenance issues.
Plainly, with credentials like these, Class A buildings attract the best quality tenants with the deepest pockets. Often, the tenants are prestige companies like law firms and financial institutions. In fact, these kinds of tenants enjoying having copy centers and mail collection services on premises. Also, Class A buildings employ the most reputable property management companies who maintain the properties flawlessly.
Class A Buildings Are Easier to Finance
Normally, Class A buildings charge high rents and provide strong net operating income (NOI). Naturally, this makes them easier to finance, with more options, lower rates, longer terms, longer amortizations, and higher leverage. Typically, the building is the primary or sole source of collateral, and lenders might approve non-recourse loans more easily. Statistically, look for lenders to require a lower debt service coverage ratio, as little as 1.15 to 1. Also, cap rates will be in the 4% to 8% range, depending on the market.
What is Building Class B?
Class B buildings are second-best, but that’s really not too bad at all. While tending to be slightly older than Class A, Class B buildings frequently attract good tenants and property managers.
Characteristics of Building Class B
Class B buildings have good, if not spectacular, amenities. Undoubtedly, some were formerly Class A buildings 10-20 years ago but lost some of their luster over time. Often, savvy investors purchase Class B buildings in the hopes of rehabbing them and restoring their Class A standing. Inexpensively, investors might execute this strategy by renovating the front façade and the common areas. Hopefully, renovationg will result in a well-maintained building that is not functionally obsolete. Naturally, the tenants are generally lower income, and the building might lack professional management. Some deferred maintenance issues might exist. Nonetheless, investors often view Class B buildings as value-add investments because of upgrade possibilities. Cap rates for Class B are higher than those for Class A, due to higher risk.
Building Class B is OK
Don’t look for top quality fixtures, luxurious lobbies or distinctive architectural details in Class B buildings. Clearly, that’s why Class B buildings command average rents, less prestigious locations and ordinary amenities. Frequently, many of these buildings are only four stories or fewer and are available in suburban settings. Naturally, you can expect a fair amount of uncovered on-site parking, mediocre visual appeal, and functional HVAC systems. Sadly, the technology in the building is not leading-edge, perhaps a little outdated. Likely, finishes will range from good to average. Indeed, security will be less tight than that on Class A buildings. Plainly, these are the kind of offices that mid-market lessees favor because they are more affordable. Often, Class B buildings may offer solid tenant-improvement packages to increase leasing activity.
What is Building Class C?
Class C is the lowest classification of office buildings. Generally, these buildings are more than 20 years old and reside in less-desirable areas.
Characteristics of Building Class C
Frequently, Class C buildings are rundown, require extensive renovations and are undistinguished architecturally. Moreover, you should expect these buildings to have outdated technology and infrastructure. Naturally, Building Class C commands below-average rents, which can suit no-frills tenants that are facing challenging economic situations. Of course, you would expect these buildings to take the longest to rent. Clearly, brave investors might see these buildings as opportunities for re-development. Importantly, investors should realize that Class C buildings often require higher repair and maintenance spending.
Building Class C Is Not Terrific
Unsurprisingly, Class C office can cramp your style, with low ceilings and small windows looking out onto back alleys. Furthermore, the public rest rooms might receive poor maintenance, and the building might suffer from chronic dirt and odors. Moreover, tenants may have to walk up to their offices, and air conditioning might prove iffy. Naturally, you’re unlikely to encounter a lobby attendant, or even a lobby. Usually, on-site parking is rare, as is a security staff or on-premises dining. Frequently, landlords must assume a slumlord mentality and cannot afford to keep the buildings in good shape. Sometimes, tenants have to deal with homeless locals who may be drunks, drug addicts, prostitutes and pimps. However, many Class C buildings are in less dire straits, and investors might rehab some into Class B.
Building Occupancy Classifications
Building occupancy classifications are not related to quality standards. Rather, they deal with a building’s function and are helpful for fire code enforcement. The main building occupancy classifications are:
- Group A: Places where people assemble for worship, dining or entertainment. It consists of five subgroups for theaters, restaurants, churches, indoor sporting events and outdoor stadiums.
- Group B: Buildings where tenants offer business services, such as banks and government buildings.
- Group E: Day care and school facilities up to the 12th grade.
- Group F: Factories and places where tenants repair or manufacture goods.
- Group H: Places housing hazardous, toxic or flammable materials.
- Group I: Institutions like nursing homes, prisons, hospitals and insane asylums.
- Group M: Mercantile establishments like grocery stores, gas stations and box stores.
- Group R: Residential structures including apartment building, houses, hotels, motels and SROs.
- Group S: Storage locations for non-hazardous items.
- Group U: A catch-all category for miscellaneous and utility structures, such as sewage treatment plants, barns and towers.
Note that some structures belong in multiple groups because they have mixed occupancies. In these cases, local government enforces the strictest applicable codes.
Type A and Type B refer to buildings constructed to different fire safety standards. Specifically, these are suffixes to category types I though V. Typically, Type A structures exhibit higher fire safety standards than do Type B structures.
Yes indeed. Often, investors will purchase Class B buildings for a good price. Then, they rehab the buildings up to Class A standards. Also, this could work in elevating a Class C building to Class B status, but seldom Class A.
It depends on your risk tolerance. Class A is good if you want low-risk income and a modest return. Class C is best for steely investors who wish to renovate or repurpose a building. Class B is intermediate, providing more affordability than Class A with less risk than Class C.
Yes, there are three international building classes. Firstly, investment properties are located in the best world markets, and resemble the domestic Class Building A designation. Secondly, institutional properties are big enough to draw attention from large international and domestic investors. Thirdly, speculative properties follow vernacular design conventions and emphasize functionality rather than aesthetics.