The 3 Classes of Office Buildings: What Do They Really Mean?
When it comes to office space, it’s pretty clear that the glamorous downtown tower with imported Italian marble in the lobby and concierge or valet services is classified as “Class A” in the world of commercial real estate.
At the same time, it probably comes as no surprise that the no-frills space with its paneled walls and fierce fluorescent lighting located in a less-than-prime part of town is likely designated “Class C.”
However, classifying office space isn’t always this cut and dry. What about all the space in between these extremes? And what do the “Class A, B, and C” rankings really mean and who determines them?
It’s more of an art than a science
Despite attempts to classify the quality of space, there’s really no hard-and-fast official grading system, and brokers in their individual markets don’t operate under a single set of definitions for each class.
“It’s all subjective,” said Coy Davidson, Senior Vice President at Colliers International in Houston, to VTS. “BOMA has a standard it goes by, but it’s still totally subjective by whoever puts the listing in.”
Basic rules of thumb
While it varies from firm to firm, criteria that brokers typically use to classify buildings includes: age of the building, location/accessibility, infrastructure, technological capabilities, rental rates, market perception, quality of the HVAC system, how well it’s maintained, finishes, tenancy, ownership, and of course, amenities. These can all determine whether or not a property is rated as Class A, B, and C office space. Here’s a rundown (with a little help from BOMA):
What is Class A office space?
These are the “most prestigious buildings competing for premier office users with rents above average for the area,” and they have a “definite market presence.” Class A buildings have a prime central location with exceptional accessibility and are usually of significant size. Class A buildings aren’t always newly built — older distinguished buildings with outstanding ownership in prime markets are often Class A due to their market presence (think Rockefeller Center).
Class A boasts high-end tenant improvements and high-quality, first-class finishes, high-tech security, the latest in elevator and HVAC systems, and state-of-the-art technological capabilities. In other words, these buildings are built to impress.
Tenants who seek out Class A properties are usually businesses for whom office space is not just for employees, but also for clients —and they want to give a top-notch impression. These businesses are often found in financial districts and may provide professional services like law firms, architecture firms, advertising agencies, or financial management companies.
Amenities in Class A office buildings can include (but are not limited to):
- Concierge services
- Valet services
- Dining options
- Daycare centers
- Covered parking
- Bike storage
- Private outdoor space
What is Class B office space?
Class B buildings “compete for a wide range of users with rents in the average range for the market.” They’re generally nice, fully-functional buildings but don’t typically boast the same high-end fixtures, architecture, and striking lobbies as Class A buildings. They’re well-located in solid markets but might be just outside a central business district. They’re typically older but still have higher-quality tenant improvements (although finishes may be somewhat outdated). Maintenance and upkeep are solid. Buildings offer HVAC and elevator systems that are functional but not top of the line. Technological capacity is adequate. They may have on-site parking but it’s uncovered.
Tenants who occupy Class B buildings don’t necessarily need to be right in the middle of the action, nor do they need an outward display of prosperity, but they want to ensure employees have a comfortable, modern workspace. Class B tenants include companies that value function over form, and are often in fields like IT, creative services, call centers, and smaller professional services catering to a less flashy crowd.
Class B amenities may include:
- On-site parking
- Conference rooms
- Bike storage
- Cafeteria-style or cafe dining
- Shared outdoor space
What is Class C office space?
Class C buildings are usually sold as fixer-uppers for investors who want to move them up to Class B status, but they’re also for tenants on a budget who need functional space at rents below the average for the area. These businesses often use Class C office space primarily as a home base for service operations that happen off-site.
Tenants of Class C properties may include small businesses that are industrial or service-oriented, often with blue-collar workers. These may include companies that do engineering, landscaping, sign making, security, construction, plumbing, electrical, etc.
Class C amenities may include:
- Onsite parking
- Break rooms
Although not perfect, we need a ranking system
The building classification system varies significantly between markets. For example, a Class A office building in Omaha won’t be comparable to a Class A building in downtown Los Angeles. That’s why it’s important that buildings be viewed in the context of their specific markets. However, that’s not an exact formula either, because classifications even vary within a city itself — from submarket to submarket and downtown to the suburbs.
“I lease a couple of suburban buildings considered Class A in a small submarket, but if you stuck them in a bigger Houston submarket they would probably be Class B buildings,” Davidson said. “Also, there might be a little boutique building that’s just knock-your-socks-off, but it’s only 20,000 square feet and doesn’t have the same amenities as a 1-million-square-foot office tower.”
Davidson points to other challenges, including the many buildings that straddle the fence between classifications, and the fact that a landlord may have a “more generous opinion of their building” than the market. Building classifications may also change over time as buildings age and markets shift.
The consensus is that even a loosely designated classification system helps brokers, landlords, investors, and tenants compare buildings that compete for similar types of users.