Typically, commercial real estate investors apply a simple, straightforward grading system to rate the quality, location, and other key characteristics of a building. The typical classes are A, B, and C.
Building classes apply to all commercial product types, multifamily, retail, industrial, and office.What the “grade” tells us is how competitive an asset is compared to all the other assets in that particular market. Fairly straightforward, the higher the building’s class, the higher the proportionate rents and overall value.
Keep in mind, this is certainly not a perfected, scientific system, and opinions of an asset’s class will vary.
These are the premium assets in a marketplace. High end construction finishes, top of the line mechanical systems, and modern architectural design. Class A buildings will also have high end amenities. Typically the most “successful” or affluent tenants and businesses in the area will be found in these properties.
Take all of the attributes from a class A asset, and step it down a notch and you’ll find Class B properties. More often than note, former class A buildings that are now dated become relegated to B status.
These assets are the least desirable of all assets. Older buildings. Dated finishes. Etc.
As value add investors, we don’t just invest in class A buildings because they are the “best.” Where true value is unlocked is taking dated B or C product, and stepping it up a class or two with a focused cosmetic repositioning.
The beauty of this type of strategy is that buildings are always getting older, so there is no shortage of deal flow. Ever see a well located, but significantly dated building in your market? This could be a good candidate for a “class repositioning.”