property classes in commercial real estate

There are various types of commercial real estate property classes and types. Each of these property classes has different characteristics. Therefore, while commercial real estate investors have a wide variety of investment options in this asset class, it is noteworthy that they should carefully analyze individual property classes in commercial real estate before investing in the one which suits their objectives the most.

So, in this blog, we will discuss the property classes in commercial real estate and crucial details about their location, built conditions, and the risk associated with investing in them.

Read Lilypads’ blog on commercial real estate investments for new investors here.

Property classes in commercial real estate: the basis for their classification

Broadly, there are four different types of commercial real estate assets. These include Office, Industrial, Retail, and Multifamily.

However, there are four property classes in commercial real estate. These include Class A, Class B, Class C, and Class D. Commercial real estate professionals have classified the properties with alphabets to make it easier for interested investors to rate them according to their build quality.

This is important because property classes in commercial real estate indicate different levels of risks and return that an investor can expect. 

Therefore, the distinct property classes in commercial real estate enable the investors to select the properties that align with their risk aversion and return objectives.

Moreover, each property classification is a combination of its physical and geographical characteristics. So, the alphabets A, B, C, and D represent various factors, including:

1. Property age

The age of a commercial real estate asset influences its classification. Class A buildings are typically newer, while Class B and Class properties are relatively older.

Hence, Class A properties comprise a lesser risk of investment than Class B and Class C.

2. Asset condition

Besides The age of the property, its condition is also one of the leading factors of its classification.

Therefore, class property with high-end renovations and upgrades achieve Class A status. But, the buildings that are weathered and are in need of cosmetic and structural repairs fall into the categories of class B and class C buildings.

3. Location of the property

Class A properties are located in highly desirable urban locations. But, Class B and Class C properties are located in less desirable lower-income neighbourhoods.

Therefore, the location of a commercial property can directly affect its investable quality.

4. Amenities

Class A properties are equipped with majorly popular amenities like a media room, on-site fitness center, concierge, underground parking, pet daycare, outdoor pool, and so on.

However, class B and class C properties offer fewer or no such amenities to their tenants.

5. Occupancy

In addition to the aforementioned factors, occupancy also plays an important role in the classification of commercial real estate properties.

Therefore, Class A buildings witness the lowest vacancy levels. On the contrary, Class B and Class C properties have more variable occupancy levels.

6. Quality of tenants

Class A properties typically Attract quality tenants or high-income earning professionals with higher credit scores.

But, Class B and Class C properties usually have less desirable tenants and medium to low income earning professionals with lower credit ratings.

In addition to these factors, rental income, appreciation, and growth properties of an asset also influence its classification.

The primary property classes in commercial real estate:

Although there are four classes, three of them are considered investable, the fourth is more speculative in nature.

So, each commercial real estate falls in any of the four categories below:

Class A commercial real estate asset

Class B commercial real estate asset

Class C commercial real estate asset

Class D commercial real estate asset

The Lilypads Bottomline : choose wisely before investing in one of the suitable property classes in commercial real estate

The property class investors choose can have a great deal of influence on the stability of an investment over time. Also, it affects the growth appreciation. Therefore, it is ideal that commercial real estate investors add properties to their portfolios in accordance with their individual risk tolerance.

However, it is evident that Class A commercial real estate assets are inherently safer investments than Class B or Class C assets. Since Class B and Class C properties demand a more hands-on approach with renovations and higher up-front capital investments, these investments may suit only the most adept and experienced investors.

But,  again, investors having a higher risk tolerance can select Class B and Class C assets as they trade at higher cap rates and generate higher returns than Class A assets. On the other hand, Class A investors can preserve their investments and as they are investing in top-tier properties.