The property class system categorizes commercial real estate properties making it easier for investors to evaluate the value and risk involved in an investment. Firms and investors use a combination of various factors to determine the class of each property.
Commercial Real Estate Property Class Types
Commercial real estate property classes are meant to function as comparative indicators that help investors identify various business properties within the same market or area. Because commercial properties vary in quality, location and age they can be classified into three main groups: Class A, B, and C.
Factors that Determine Property Class
Investors normally consider these relative metrics for the purpose of comparison with other buildings in the same market or region. Excelling in one category won’t necessarily cause a property to rank in Class A– it is instead a combination of all factors. The determination of a property’s classification is a combination of some or all of these factors. These criteria normally include:
- Risk & Return
- Features and Amenities
- Quality and Condition
- Location and Accessibility
- Growth Potential
- Market Perception
The three main property classes present a different level of risk or opportunity for an investor and how it may impact their investment portfolio. As buildings get updates or become dated, they can shift classes. An ideal location will always add value, while a less favorable location may prevent a nice building from being considered Class A.
What’s the Difference Between Each Commercial Property Class?
Class A is the best quality with the least risk, while Class B and C fall below in descending order. The range from premium amenities and quality location to outdated and unfavorable markets creates a grading system to help classify commercial real estate property.
Property Class A
Class A properties are the most prestigious of the three classification types. They are typically new buildings located in central business districts. They are therefore found in heavily populated areas with access to public transportation which makes them more desirable to both an investor and tenant. Due to these premium qualities, rents frequently exceed the market average.
Property Class B
Class B properties are functional, sometimes outdated, buildings that provide average market rents. They are older than Class A buildings, which implies that the investment opportunity presents a higher risk. Class B buildings are not in prime locations but are still in well-populated markets. They typically have average finishes, good quality, and minimal amenities.
Property Class C
Class C properties are the lowest quality classification and are often in disrepair. These commercial properties are typically older than 20 years, in unfavorable areas, and provide below-average rents. They often require more significant capital investment in order to maintain and repair.
Investing in Different Commercial Property Classes
Since there are different risks and rewards associated with each classification, it is important for investors to understand the details of investing in each kind of property. Class A properties provide the most security and capital preservation to investors since they have little to no outstanding issues that could result in further capital investment. Class B and C properties, however, tend to be bought at higher cap rates than Class A properties. For the additional risk that investors take on by investing in a lower-class property, more reward can be earned through the potential growth appreciation of these properties.
Sands Investment Group can help you find the best opportunity for your portfolio in any property class. We are a leading commercial real estate brokerage firm specializing in purchasing and selling investment properties. We provide services to private investors and institutions in the U.S., offering different sub-product type specializations. Contact us today or visit our website to get started.