Property classes allow commercial investors to truly understand the value and potential future value of a real estate asset.
They’re meant to give interested parties a general idea about the quality of a property based on various criteria such as the building’s age and condition, location, and much, much more.
In this post, we will define the most common property classes—A, B, and C—and look at how you can identify your next investment based on its class-level.
- About Property Classes
- Class A Property
- Class B Property
- Class C Property
- How to Decide Which Class to Invest In
- The Problem With Property Classes
About Property Classes
Class assignments are based on a combination of physical, geographic, and demographic factors. Because they describe the characteristics of buildings, they can be used to evaluate potential real estate investments.
While classes A, B, and C are typically always used, some CRE investors and brokers have very granular breakdowns, classifying buildings from Class A through Class F, and may include subcategories like B+ or B-.
From investment standpoint, each building class represents different levels of risk and return.
Investors can use the differences in property classes to determine how each property fits within their strategy – the return objectives and amount of risk they are willing to accept to achieve those returns.
So then, what is the difference between the classes? The short answer is that it is all relative.
A Class A building in one market may not be considered Class A somewhere else. Each class holds a certain value relative to the market where the property is located.
Class A Property
Class A properties are considered fairly low-risk assets by real estate investors.
These types of buildings are often newly built and have high-end finishes. They are located in high-income, low-crime-rate areas, usually outside of cities.
They tend to be constructed in neighborhoods with good schools, access to highways, and shopping and medical facilities. Such areas also boast measurable growth in population, jobs, and infrastructure that creates high demand for prime real estate.
Additionally, Class A buildings are likely to be in locations with a high percentage of owner-occupied properties. Owner occupants tend to care better for their homes and neighborhoods, as they have invested directly in the area.
Due to all these factors, Class A rental properties usually demand higher rental rates and have low vacancy. Also, because they are newer, they tend to have lower maintenance costs.
The high demand for these low investment risk properties has lead to higher purchase costs. Because of this, Class A buildings generally offer lower cash flow than Class B or C assets. On the positive side however, the high demand means that Class A real estate is also easier to sell.
Overall, Class A properties offer good, safe opportunities to investors who want fewer issues and fewer expenses.
How to Identify Class A Property
For commercial property of any class, Reonomy OffMarket lets you easily find your next investment, along with the necessary owner details and contact information to make that investment a reality.
Let’s say you are searching for Class A commercial properties in or around Washington D.C.
You can start your Reonomy property search by adding location filters in Virginia, in the metro area of D.C., looking a few miles outside the city – perhaps in Arlington, for example.
Next, you can add an asset type filter to search for a specific property type. In this case, let’s say you are looking for a multifamily property. To do this, you can visit the Asset Type tab of Reonomy’s search page to add a filter for multifamily properties and a number of multifamily subcategories.
Additionally, you can visit the Building & Lot tab to add more specific filters for your desired property, like number of units, building and lot size in square feet, whether the property is in an Opportunity Zone, and more.
Maybe you are an investor who is only looking for properties built in or after 2010. You can either use the Year Built filter in the Building & Lot tab, or you can simply select a property that match your age criteria from the list of results.
You can also add sales history filters in order to identify properties that are more likely to sell in the near future.
After you run your search, you get a list of results and you choose a single property you would like explore further. Perhaps you come across 1200 N Rolfe St, Arlington, VA 22209.
If it seems like a property that fits all of your Class A investment criteria, you can just do a quick search on it for further analysis.
In this case, you will see that the property is a luxury apartment complex with high-end features and amenities in an affluent low-crime area.
If you are interested in pursuing the property further in Reonomy, you can quickly get owner contact information directly from the building’s profile page.
Class B Property
While these properties tend to be a bit older than Class A, they can still have quality management and tenants. Generally, Class B buildings are located in well-kept areas with slightly lower income rates than Class A, and more investor-owned and tenanted properties.
It is worth mentioning that some Class B buildings’ location and circumstance may allow the possibility of restoration to Class A status through facade renovation, common area improvements, and amenities upgrades.
Class B properties offer investors the opportunity to create a substantial cash flow.
How to Identify Class B Property
When you are searching for a Class B property in Reonomy, you can once again start by identifying a target area, as we discussed in our Class A example above.
In this instance, let’s search for office buildings in Raleigh, North Carolina.
Using the Asset Class filter, you can identify properties that are classified as “office.” Next, you can further narrow down the list of results based on factors such as year built or number of units.
For example, you can search specifically for buildings that are between 15 and 20 years old. This can make your Class B property search very granular.
You can then select a single or multiple neighborhoods using the map draw tool in order to pick specific areas that may be up-and-coming or safe, and have a mid-range income level.
You can use this information to also identify locations where Class B properties could possibly reclassify as Class A assets.
Class C Property
Class C properties can be very lucrative investments with the right strategy, however they carry the highest risk of any building class.
Typically, these properties are more than 20 years old and many show visible deterioration.
Class C buildings are often located in less than desirable areas that may have higher crime rates. They tend to be predominantly investor-owned and occupied by tenants in lower socioeconomic groups.
While Class C properties offer the potential for higher cash flow than other building classes, they often require a lot of improvements and hands-on management. For that reason, Class C investments are usually taken on by experienced investors and property managers.
How to Identify Class C Property
An example search for Class C real estate would be to look for older properties.
For example, you could search for a building in Detroit that might be Class C, but in a more up-and-coming area of the city that has the potential of turning into a strong investment with some renovation.
To do this, you can search Reonomy for office buildings that were built or last renovated more than 30 years ago.
You can then limit the search within specific neighborhoods, or for properties that have not been sold in the last 10 years or so.
You can also easily look at other parcels in the neighborhood to see if there have been any recent sales or renovations in the area that could increase the potential for positive growth.
How to Decide Which Class to Invest In
In general, there are no rigid guidelines when it comes to investing in real estate.
For example, you may find a Class C property in a Class B area that could be the right opportunity for value-add investors looking to turn profit. Again, it is all relative.
The most important takeaway for investors is to understand that each property class represents a different level of risk and reward.
When to Choose Class A and B+ Properties
Class A properties tend to have the greatest potential for appreciation. Additionally, because risk increases with lower property classes, Class A buildings are viewed as the least risky investment option.
Class A provides investors with a peace of mind because they are putting their money in top-tier properties with little or no outstanding issues requiring further capital expenditures.
It is worth mentioning however that despite better property conditions, Class A real estate can become sensitive in economic recession times when high-income earners may suffer from increased unemployment.
If you are looking for investments with the highest appreciation potential and you aren’t worried as much about the initial cash flow, you would want to look for A and B Class properties in affluent areas, and avoid C Class buildings altogether.
When to Choose Class B- and C Properties
If you are looking for investments with strong cash flow, but appreciation is less important, you should consider Class B and C properties in less desirable areas.
As we mentioned earlier, Class C properties are the riskiest real estate investments. Risk can be in the form of dealing with evictions and delinquent rent payments. Vacancies also tend to go up as you move towards Class C properties.
Following the risk curve is also the level of management required to operate the property. Lower class buildings usually attract lower quality tenants so property management will be more intensive. Class A assets tend to run smoothly, whereas Class C properties will require greater oversight to collect rents, perform maintenance, and deal with tenant problems.
It is important to note that Class B and C properties are often bought and sold at higher cap rates than Class A. Investors are paid for the additional risk of an older property with lower income tenants.
In conclusion, the class of a property can have a great deal of influence on the stability and growth appreciation of the investment over time. Investors looking for capital preservation should consider Class A whereas those interested in cash flow may do better with Class B and C properties.
The Problem With Property Classes
The biggest problem with using property class labels is that there is no universally accepted standard and different investors often use their own definitions.
For example, some might classify a property exclusively based on the rankings of nearby schools. Others may pay less attention to the location and instead rely heavily on the building’s condition or age.
The one certain thing here is that regardless of the property class you are interested in, Reonomy’s advanced search options can help you find the next lucrative investment opportunity with ease.