Commercial Real Estate Classifications: Office Buildings
Office buildings, like any commercial real estate, range in quality, age, and infrastructure. No two office buildings are the same. There’s a classification system for office buildings to aid investors, brokers, and developers identify and compare buildings in the market that compete against each other for tenants. However, the classification system isn’t rigid or scientific. In fact, it’s more subjective than you’d think. Additionally, building classifications vary from area to area. For example, a Class A+ building in Dallas, Texas may not be classified as such in New York City.
How Is Office Building Classification Determined?
While there’s no definitive formula for evaluating office buildings, the classification system typically revolves around Class A buildings. For example, Class B and Class C buildings are classified as such in relation to a Class A building in the same market. These relative classifications are why it’s important for real estate developers and investors to understand the specific market before investing in commercial real estate.
Additionally, for investors entrenched among many markets, the international base classification system is most useful for classifying office space.
Overview of Office Building Classifications: Metropolitan Base
The following is a general overview of a metropolitan-base office building classification system and what investors and brokers evaluate when classifying a building into either Class A, B, or C.
Class A buildings are the highest quality buildings in their market. Class A+ and A buildings typically have the best construction quality and infrastructure in the area. They’re accessible, in a prime location, and managed by experienced professionals. Class A buildings also have desirable amenities in order to attract the highest-quality tenants. Most often, Class A+ and Class A buildings are occupied by white-collar companies such as financial institutions or law firms. Some other hallmarks of a Class A+ or Class A office buildings include:
Class B buildings are classified as such in relation to the Class A buildings in the same market. Most often, Class B buildings are described as average to above average. These properties are older than Class A buildings in the same market and may have some deterioration. Class B buildings may have started out as Class A buildings, but after ten years or significant wear-and-tear, they’re downgraded. Other identifiers of Class B office space include:
Class C commercial properties are the “worst” structures in the market. These buildings are usually 20 years old or more and in need of significant repair or upgrades. The difference between Class C properties and Class B properties is that Class C properties may be able to be upgraded to Class B properties with significant repair, but they will likely never be upgraded to Class A properties due to their location and age. Class C properties are usually located in the least desirable areas in the market. While many Class C office buildings are occupied by small businesses or other tenants that do not need to be located in a centralized hub, some are sold as rehabilitation and development opportunities to other developers or investors.
Overview of Office Building Classifications: International Base
In contrast to the metropolitan base system of Class A, B, and C buildings, the international base classification system is used by investors working in multiple markets. These classes include investment quality properties, institutional-grade properties, and speculative properties.
Investment quality properties are seen as the highest quality buildings in the best metropolitan markets. These properties are sought-after and seen as leaders in the international investment community. Typically, these buildings involve state-of-the-art HVAC, electrical, mechanical, elevator, and communication systems. Additionally, they often have a lead tenant, and the building’s often named after that tenant.
Institutional grade properties attract large national and international investors. These properties typically have a stable tenant base, and they may be located in secondary metropolitan areas. However, these properties are typically large and of good design, though they differ from investment quality properties in that they are not monumental in design or use of materials.
Speculative properties are often occupied by multiple tenants and may not attract as much international attention unless they are large. These properties aren’t as exceptional as institutional-grade or investment-quality properties, but they do reflect modern design conventions.
Kaufman Construction & Development, Inc.
Kaufman Construction & Development has been designing, developing, constructing, and leasing commercial properties throughout western Washington for more than half a century. As a member of the Building Industry Association of Washington, Kaufman Construction & Development is proud to serve Washington state with high-quality construction, design, development, and property management services. Call today to see how we can help you!