Commercial Office Building Ratings are made using a system of Classes. The Class of a building can vary, but certain key elements exist.
Office Building Ratings
While no objective metric exists for office building ratings, there is a generally accepted method of classification. This system is used by tenants, landlords, and the brokerage community alike to determine rental rates, market properties, and prepare market data reports in an easily digestible format. The system to which I’m referring is one based on Classes – specifically Class A, B, and C. It is important to remember that this is not a strictly governed system of measurement for commercial office buildings. However, it can be effective for generally rating and comparing properties. Let’s dig into each:
Class A
Class A office buildings are generally the newest construction in a given market, and offer the highest level of amenities, services, and overall appearance/stature to tenants. They are usually found in the most sought after locations within a city, such as well-know financial or central business districts. Businesses that require a high-end appearance or simply prefer luxurious surroundings will find Class A properties quite appealing.
Amenities & Construction materials
The commercial real estate industry is always focused on the “next big thing” that tenants want in office space. The list of amenities and services offered to tenants of Class A office buildings shift to meet these ever-changing demands. Sprawling fitness centers with locker rooms, ornate building conference centers, dry-cleaning pick-up, car detailing, and more can often be found at the trendiest of Class A office buildings. Parking is another important element for any office tenant. Class A office buildings will almost always have structured parking garages with plenty of reserved parking available.
The quality of building materials is typically another marker of Class A properties. Just as residential finishes can range from Formica to Granite and now Quartz on the high end, so too can commercial interiors. The interior design and material/finish selections will have a significant impact on the ambiance and environment in any commercial property. When you enter a Class A building there is a noticeable modern or contemporary feeling as a result of these finishes.
Rental Rates
Class A office buildings will command the highest rental rates in the market. Highly sought after locations equate to higher real estate taxes, and the top-notch amenities and services combine to escalate building operating expenses as well. Nearly all Class A office buildings will quote rental rates on a triple net “NNN” basis. Check out my article on Understanding Office Rental Rates for more explanation on that topic.
Class B
Class B properties are generally considered the next step down from Class A. The ratings can seem easy and straight-forward when focusing only on Class A properties. However, it is more ambiguous with Class B locations. Many Class B office buildings are simply older properties which began as Class A years earlier. The construction and design elements which were once trendy and popular become faded and outdated over time. Some building owners invest capital in renovation projects to revamp common areas such as the lobby, common corridors, and restrooms. Renovation projects can include additions of desirable tenant amenities like those listed above in Class A properties. The changes are an effort to compete with newer built Class A properties and attract new tenants. Large-scale renovation projects to aging Class A properties can be successful in maintaining a Class A rating for the most desirable locations. Locations with less demand will end up with aging office buildings becoming down-graded from Class A to B.
Amenities & Construction materials
Class B properties tend to lack some of the amenities and services that Class A buildings offer. It would be unusual to find dry-cleaning pickup and car detailing in these buildings. Class B office buildings may have a structured parking garage, but it will likely be smaller and of lesser quality. Surface parking spaces are often present as a way to improve the parking ratio of the building when a smaller garage is present.
Rental Rates
The rental rates charged for Class B buildings are lower than those at Class A properties. Real estate taxes may be lower, and the building will most likely have lower operating expenses. The rates may be quoted as either full service/gross or triple net. Rates in Class B buildings can vary for a number of reasons, but will generally be 20-30% lower than Class A rates.
Class C
Office buildings rated Class C can be considered the no-frills option in the market. These properties will tend to exist in less-desirable areas. Very often Class C buildings will not be professionally managed. The amenities offered to tenants will be few to none. Parking at these buildings is likely to be completely surface lots. These buildings may require extensive renovations, and real estate developers may target them for re-development projects. They can be an attractive option for cash-strapped startup businesses, and for smaller companies with the majority of stakeholders living in the area.
Summary
Office building ratings can be obscure and subjective. Many factors effect how a particular property is viewed and rated in the market. However, the class system described above can be used as a general roadmap for classifying and understanding the quality of a given office building.