Most commercial investors and brokers classify properties as Class A, B, or C.
While some brokers may rank from Class A through F, or may include subcategories of each, such as A-, B-, and C-, generally, A, B, and C will always be included.
Whatever the case may be, these classes refer to the location of the property, and to the asset itself.
In this post, we’ll define property classes A, B, and C in-depth, then look at how you can find investment opportunities of each class using Reonomy.
- Class A Property
- Class B Property
- Class C Property
- How to Decide Which Class to Invest In
- The Problem with Property Classes
Property classes describe the characteristics of a potential real estate investment. They’re based on a combination of physical, geographic and demographic characteristics.
For investors, property class is an important factor to consider because each class represents a different level of risk and return.
Investors can use these differences in property classes to consider how each property fits within their strategy—return objectives and amount of risk they are willing to accept to achieve those returns.
So then, what is the difference in each class? The short answer is that it’s all relative.
A Class A building in one market may not be a Class A property in another market. Each class holds a certain value relative to the market they’re in, and therefore can be defined.
Class A Property
Class A properties are fairly low-risk assets.
They are typically newly built and have high-end finishes. Location for these types of buildings usually have a high income, low crime rate, and are usually outside of cities.
They’re also typically areas with good school districts, access to highways, shopping and medical facilities. These areas also boast measurable growth in jobs, population, and infrastructure that creates high demand in real estate. This means low vacancy and higher rental rates.
Class A properties are likely to be in areas with a high percentage of owner-occupied properties, as well. Owner occupants are likely to care for homes and neighborhoods, as they have invested directly in the area.
Class A rental properties usually demand high rental rates, and because they are newer, usually have lower maintenance costs.
Despite lower levels of risk in investment, Class A properties generally offer lower cash flow than Class B or C investments. They have a higher demand, which leads to higher purchase costs.
The safety of Class A properties has led to the perception that they’re easier investments. Higher demand, however, also means that they’re easier to sell.
Overall, Class A properties offer security to investors that 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’re searching for Class A commercial property 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 of the city—perhaps in Arlington, for example.
Once you’ve done that, you can add an asset type filter to search for a specific property type. In this case, let’s say you’re looking for a multifamily property.
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. Then, you can visit the Building & Lot tab to add more specific filters for your property, like number of units, building and lot size in square feet, whether the property is in an Opportunity Zone, and more.
Maybe you’re an investor that only wants to search for properties built in or after 2010. You can either add a filter for that in the Building & Lot tab, or you can simply select a property from your list of results.
You can also add sales history filters to search for properties that are more likely to sell in the near future.
At this point, you get a list of results and decide to dive into a single property. 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 the property for further analysis.
In this case, you’d see that the property is a luxury apartment complex with high-end features and amenities in an affluent and low crime area.
If you’re interested in pursuing the property further in Reonomy, you can quickly get owner contact information directly from the property’s profile page.
Class B Property
These properties are a bit older than Class A, but still have quality management and tenants.
One aspect the distinguishes a Class B is if the building’s location and circumstance allow the possibility of restoration to Class A status through common area improvement, renovation, or facade.
Generally, the area is well kept but has a slightly lower income than Class A, more investor-owned and tenanted properties. Class B properties offer the opportunity for investors 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 again start by identifying a target area, as we mentioned above in our Class A example.
In this example, we’ll say you’re searching for office buildings in Raleigh, North Carolina.
Using the asset class filter, you can identify properties that are classified as an office. From there, you can further identify properties based on year built or number of units.
You can also search for buildings specifically in between 15 and 20 years old. This makes your Class B property search very granular.
You can then select single or multiple neighborhoods using the draw tool to isolate the specific neighborhoods that are either up-and-coming or safe and have a mid-range income level.
Here, you can decipher the areas where Class B properties may soon reclassify as Class A properties.
Class C Property
Class C properties can be very lucrative investments with the right strategy, but carry the highest risk of any classification.
Typically, these properties are more than 20 years old or are located in a less than desirable location.
Many show visible deterioration, are located in areas that tend to have higher crime and are predominantly investor-owned and occupied by tenants in lower socio-economic groups.
Class C properties offer the potential for highest cash flow out of the classes, but often require a lot of improvements and hands-on management. Class C investments are usually taken on by experienced investors and property managers.
How to Identify Class C Property
An example search for a Class C property would be limited to older properties.
For example, you could search for a building in Detroit that might be a Class C building, but in a more up-and-coming area of the city that has the possibility of turning into a strong investment with some renovation.
To do so, you can search Reonomy for office buildings that were not built or renovated in the last 30 years.
You can then search within more specific neighborhoods, or for properties that have not 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, these are not rigid guidelines. For example, there can be a Class C property in a Class B area. In this case, it might be the right investment decision for value-add investors to turn a profit. Again, it’s all relative.
It is most important for investors to understand that each class of property represents a different level of risk and reward.
Class A provides investors with more security by knowing that they are investing in top-tier properties, with little or no outstanding issues requiring further capital expenditures.
Despite better property conditions, Class A can be sensitive in times of a recession if high-income earners suffer from increased unemployment.
When to Choose Class A and B+ Properties
Class A properties tend to have the greatest potential for appreciation. Risk tends to increase with lower property classes, so Class A properties are viewed as the least risky investments with the highest appreciation potential.
On the contrary, Class C properties are the riskiest investments with the least appreciation potential. Risk can be in the form of dealing with evictions and vacancies will go up as you go towards Class C properties.
If you are looking for investments with the most appreciation potential, but aren’t worried as much about the initial cash flow, you’ll want to look for A and B Class properties in A and B areas, and avoid C Class properties in C areas.
When to Choose Class C and B- Properties
If you are looking for investments with strong cash flow, but appreciation is less important, Class C and B properties in C and B areas would be the best fit.
Also, following the risk curve is the level of management required to operate the property. The lower the property class, the lower the quality of the tenants so property management will be more intensive. Class A properties tend to run smoothly, whereas Class C properties will require greater oversight to collect rents, perform maintenance, and deal with tenant problems.
Class B and C properties tend to be 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.
The property class investors invest in can have a great deal of influence on the stability of an investment over time, as well as its growth appreciation. For investors looking for capital preservation, Class A may be the right investment. For investors looking for capital appreciation, Class B and C may be better investments for that specific risk profile.
The Problem with Property Classes
The biggest problem with using property class labels is that different investors will use their own definition. For example, some might label a property exclusively based on the rankings of its nearby schools.
Others pay less attention to a property’s location and instead rely on the condition or age. When there’s no universally accepted standard for property classes, there’s bound to be confusion.
Still, if one thing remains consistent, it’s how you can best search for those properties and find your next lucrative investment, regardless of the property class.