What is Class A, B, or C property?
As an investor, you’ve probably heard the terms “Class A, B, or C property,” but what do they really mean? Classifying commercial real estate is important because it gives potential investors an idea of what they’re getting into. In this blog post, we’ll break down the differences between Class A, B, and C properties.
What is Class A Property?
Class A properties are typically newer construction or properties that have been recently renovated with a larger building footprint. They are located in prime locations, with good amenities and appeal to high-end renters. You can rarely find anything wrong with these properties as they are the best positioned. Investors will find the lowest cap rates for these projects as they typically attract the best tenants with strong income or credit indicators. Because of this, Class A properties tend to have the highest rents and the lowest vacancy rate with a higher price per square foot value.
What is Class B Property?
Class B properties are older than Class A properties but have also been well-maintained. They may not be located in prime areas but are still in good condition. Because of this, Class B rents are lower than those of Class A but usually higher than those of Class C. These assets are typically catering to the middle market which doesn’t want to be overextended by reaching for the Class A product type but these users do not want to be with the less desirable tenant mix and amenities that Class C offers. These are typically your suburban-style office product or garden or mid-rise apartment project that aren’t ancient in age but are relatively new and built within the last twenty years.
What is Class C Property?
Class C properties are usually the oldest properties on the market. They may need significant renovation and are often located in less desirable areas. Because of this, Class C rents are typically the lowest but vacancy rates tend to be higher. These types of projects are more catered to the lower-income demographic of the market. They don’t have a strong sex appeal of amenities to drive their value, but they do provide the basic necessities for those on a restricted income. If properly positioned these can be consistently leased but will come with their own set of issues because of the tenant mix that is attracted to these types of assets.
Can Properties Change Classes?
Properties can go up and down in their class over time. As an investor, there are various improvement strategies that can change the position of these buildings. The two things you can’t change as an investor are the location of the asset and the age of the property. An investor can renovate the property to update it and push the rents and maybe push the class, but these typically require increasing the footprint of the project or adding in amenities to cater to a different class of tenants. Properties without renovations and poor management can also drop in classes over time as age is a driving factor or the neighborhoods change in a negative way thus making the properties less desirable for tenants. Some things are in the investors’ control others are not, be aware of the things you can and can’t control to position yourself properly.
What does this Mean for Investors?
Now that you know the difference between these three classes of commercial real estate, you can start to narrow down your options as an investor. If you’re looking for immediate income with little risk, a Class C property may be a good option for you. If you’re looking for long-term appreciation potential, a Class A property may be the way to go. The best part of understanding different classes of properties is properly identifying an investment strategy that works for your dollars and your time in the project. If an Investor wants less work, and less yield, but less risk and more security then going with that Class A property is a better decision, on the flip side if an investor wants a higher yield and more risk and problems associated with the property then going with a Class C would be a better option. However, at the end of the day, it is up to the investor and their investment strategies.
At VAC Development, we look at all of these opportunities to see what fits best with where we see the market going and where the opportunities for yield are in the marketplace. We are a hands-on and heavily actively managed organization and look for problems in our acquisition process that we can overcome to enhance the value of our projects and mitigate those potential problems before they occur with our business practices and processes. We chase the individual deal, not the asset class, as all deals come with their opportunities and pitfalls. If you have a deal you need help getting funded or want to invest with us click on the links below for more information.