Commercial Properties and the Office Building Class Rating System You Need to Know
Investing in commercial property is a time-honored tradition. Whether it is boosting your local Main Street commerce or securing rental income before retirement, these office buildings provide a wealth of short- and long-term benefits.
There are roughly 5.9 million U.S. commercial buildings containing about 97 billion square feet. As you probably guessed, a good portion of this commercial real estate is in major U.S. cities. Still, there certainly is value in funding a new office space in a rural community for healthcare, IT, and government support tenants.
Before you sign on the dotted line for any commercial property, you need to know its specific classification. While there isn’t a rigid list of requirements for each class, the “grade” an office building falls into informs you more about what you can expect in size, space, amenities, and other crucial factors.
Here is a macro perspective of office buildings, their classifications, and the general expectations you should have for such properties.
What’s the Point?
Valuation is the reason for building class ratings for office spaces and commercial real estate. A Class A building with concierge services and incredible dining options will be worth more than a Class C building that may have a break room or two.
Investors, insurance companies, and local municipalities all rely on these categories to designate everything from the expected sales price to the taxes they will impose.
The good news is that categorizing these buildings is more of an art form. You can find ways to boost the value of a property with only a few added amenities – relative to your local area. However, if you seek a commercial property in NYC or LA, you’re going to have to roll out the red carpet.
Let’s get onto our list of office building categories.
Class A Office Buildings
Most of the information we’ll review comes from the Building Owners and Managers Association International (BOMA). While they are not the “official” classifier of buildings, their guidelines are the most referenced.
For example, a Class A building should be considered the most prestigious or premier space. These can be a mix of new builds or historical spaces, but they should always have the very best amenities, infrastructure, and tenant services and be owned by an individual or collective with a positive reputation.
Some of the more common characteristics of a Class A building would be:
- Property management and in-house security
- Professionally managed lobbies
- Versatile concierge services
- Valet parking teams
- Comprehensive HVAC
- Public/Private Wi-Fi access
- Covered parking (garages or outdoor spaces)
- Gyms, showers, and locker rooms
- Private spaces on the roof or outdoors
- In-house dining options
- Daycare/childcare available
- Some celebrity or premier tenants
Think of the stunning commercial real estate in NYC for comparison. Locations like 1500 Broadway in Times Square, which hosts ABC Studios, Disney, Starbucks, NASDAQ, and IIG Capital, are great examples.
Class B Office Buildings
Moving down our list of office building categories, we land on Class B sites. Most often, these were Class A buildings at one point or another but have slowly moved down a peg because of outdated technology or poor maintenance. That doesn’t mean the buildings are not worth quite a bit, but only that they are slightly showing their age.
These are fantastic investment properties because they have solid infrastructure you can easily update with a few minor tweaks. They tend to be located in significant areas near or next door to other Class B properties and have a rich history you can leverage for marketing or keeping rents at a decent level.
Most Class B buildings feature amenities like:
- Some on-site parking is available
- Advanced security parameters
- Bike or eBike storage
- Shared outdoor spaces for gathering
- Common areas besides a lobby
Look around the financial district or antique shopping areas of NYC and LA, and you’ll find plenty of examples of Class B buildings. A lot of these spaces are being renovated for “multi-use office space” like co-working or startup workspaces.
Class B is what you’ll find most investors seeking out because they are attractive, highly functional, and have a reputation for being worthwhile by the municipality and banking sectors.
Class C Office Buildings
Finally, we have Class C office buildings for you to consider. These are good investment properties if you have many smaller businesses or individual tenants lined up. They are at the lowest commercial rental pricing and do not have the same amenities as either Class A or Class B commercial real estate.
The challenge is finding a Class C office building in a good area. With the lower rent levels, it is expected that these buildings will be in a state of disrepair or will have visible signs of needed improvements. Maybe there is a “lobby” area with chipped paint and stains on the carpets or an elevator that goes slower than walking up the stairs.
The only real “amenity” for a Class C property is the actual rented space. That is why so many startups and businesses with 1-3 employees use these properties. They know the expenses will be lower, even if the location is less prestigious.
As long as you are prepared to invest in the renovations needed or have some inside track on an “up and coming” area being gentrified, Class C office buildings will come with some risks.
Wrapping Up
Plenty of commercial real estate straddles the lines between these different office building classifications. Those “in-betweeners” are an investment market all their own. That being said, having even a loose classification system helps everyone, from landlords to brokers, find some common ground in evaluating their prices, insurance, and rents.
The next time you are pursuing an office building, consider the general classification, but also look at the surrounding area. You never know when an old mill building or out-of-use office space can become tomorrow’s Times Square.