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What is a property classification in commercial real estate?
Commercial real estate is classified into three broad categories – Class A, Class B, and Class C. Investors, property owners, and lenders use these categorizations to denote a commercial property’s quality, age, location, and the type of investment opportunity it offers.
Class A commercial properties are the newest and with the best facilities. Class C properties are at the other end of the spectrum. These would probably be much older and in need of renovation. Class B properties fall somewhere in between.
Bear in mind that these classifications are not watertight. A top-end Class B property could be grouped with a Class A property. You should also remember that this three-tier classification applies to all types of commercial real estate, including multifamily, office, industrial, and retail.
Class A vs B vs C in real estate: Key differences
The three property classifications – Class A, B, and C – are an essential part of real estate jargon. Every individual associated with the CRE industry must have an in-depth understanding of what these terms mean.
The following table illustrates the key differences between Class A, B, and C properties.
| Class A properties | Class B properties | Class C properties | |
| Building quality | High-quality construction | In need of some renovation | In need of repair and refurbishment |
| Age | New construction, typically less than 15 years old | Older buildings, 15+ years | Usually, 30 years or more |
| Tenant vacancy rates | Low vacancies | Some vacancies | Possibly high level of vacancies |
| Rents | Above market-rate rents | Average rents | Low rents |
| Type of tenant | Prestigious and creditworthy tenants | Intermediate-level tenants with lower credit | A mix of tenants, some with low credit |
| Infrastructure and amenities | State-of-the-art infrastructure with modern amenities | Amenities are inferior to those available in Class A properties, but they are of an acceptable level | Poor infrastructure and an inadequate level of amenities |
| Location | Buildings in the best locations | Acceptable locations but not the finest | Often poorly located |
| Price of property and returns offered | Highly priced and low returns on investment | Lower prices could result in a higher return on investment | The lowest prices with potentially the highest returns |
| Level of risk of investments | Low risk | Higher level of risk | High-risk investment |
| Cap rates | Lowest cap rates | Higher cap rates | The highest cap rates |
What is a Class A property?
Class A properties constitute the upper end of the market. Buildings in this category are of recent construction with excellent amenities and features.
Class A property features
- Recently built commercial property in excellent condition.
- The property is at a first-rate location.
- The property offers top-class modern amenities.
- The buildings are well-maintained. No repairs are needed.
- The property is professionally managed, and tenants’ needs are promptly attended to.
Class A property example
425 Park Avenue, an office building in Manhattan, New York, is a good example of a Class A property. The 897-foot building, completed in 2022, offers state-of-the-art office space and has a club, a meditation center, and views of Central Park, among several other premium features.
What is a Class B property?
A Class B property is in the middle range of the real estate market. It is not the best that is available, but it holds its own in terms of construction quality, features, and amenities.
Class B property features
- It could be recently constructed, but that is unlikely. Many Class B properties fall in this category as they have deteriorated over the years.
- Class B properties are practical and functional. However, their amenities are not best-in-class.
- As the buildings are old, tenants do not benefit from the latest commercial real estate industry developments.
- In many instances, a Class B building could be recategorized as Class A after extensive refurbishment and upgrades.
- They usually need better maintenance.
Class B property example
Plaza 290, a 5-story office building in Austin, is a Class B commercial property built in 1986. It has all the basic amenities that tenants require.
What is a Class C property?
A Class C property could be a dilapidated structure needing urgent repairs. Some buildings under this classification could be in fair condition, but other factors would likely pull their rating down. For example, they could be in a rundown section of the city. Class C buildings would have few amenities for tenants.
However, remember that in many instances, these buildings adequately meet the needs of their tenants. The low rents compensate for the lack of amenities or poor location.
The Section 8 housing scheme
When discussing Class C buildings, it is relevant to touch upon Section 8. Section 8 of the Housing Act of 1937 provides a rent subsidy to low-income households. This federal program pays up to 70% of a residential unit’s rent directly to the landlord, and the tenant is responsible for paying the remaining amount.
Landlords could consider renting their property under the Section 8 program. The first step is to have the property you propose to rent undergo an inspection by the U.S. Department of Housing and Urban Development (HUD). If you meet the inspection criteria, you can start screening renters.
There is plenty of demand, as well as a massive backlog of rental applications. New York City recently restarted accepting Section 8 applications after 15 years. However, landlords of Section 8 properties must contend with several problems. It is a good idea to understand the implications of taking on Section 8 renters before committing yourself.
Class C property features
- Class C buildings are usually old and in poor condition.
- The properties need extensive repairs.
- They are typically not well-located.
- Tenants must manage with poor amenities and infrastructure.
- These properties usually see high tenant turnover.
Class C property example
180 North Michigan Ave in Chicago is an example of a Class C property. This office building was built in 1888 and last renovated in 2006.
Class A vs B vs C benefits
Do not assume that Class A properties are the best investments and that investors should avoid Class C properties. From a landlord’s viewpoint, each type of property holds certain advantages.
The following table lists the respective benefits of Class A, B, and C properties.
| Class A properties | Class B properties | Class C properties |
| Properties are newer and have high-quality construction, so they require minimal repairs | Often, they make a good investment as they are more attractively priced than Class A properties | Acquisition costs are low |
| Creditworthy tenants | Tenants are creditworthy (although not as creditworthy as Class A property tenants) | Class C properties can offer the best cap rates |
| High occupancy rates | An extensive renovation may help reclassify the property as Class A | Possible to make a high return on investment |
| Tenants are willing to pay high rents | Higher cap rates as compared to Class A properties | If well-located, the property can be extensively refurbished and upgraded to Class B |
Can property classification change?
Yes, a property’s classification can change. A Class B property may get upgraded to Class A after renovation. On the other hand, a Class A building may slip to Class B as it ages.
Which class of property is the best for you – Key considerations
When choosing a class of property to buy, investors need to consider several factors:
- Budget: The first step is to determine the sum you can invest.
- Acquisition cost: A general rule to follow is to purchase Class C property if your budget is low. Consider buying a Class B or Class A property if your budget is higher.
- Location: Buildings in prime locations cost more. If you want to buy a building in a good location, you will need to pay more.
- Desired rate of return: Class C properties can provide a higher return on investment, but they carry greater risk.
- Time horizon: Do your research carefully. If you need to carry out extensive renovations, your investment may take longer to pay off.
- Risk tolerance: If your risk appetite is low, opt for a Class A property.
- Investment goals: If your primary objective is to conserve capital, a Class A property is a good option. To make a higher return, select a Class B or C property.
- Market conditions: Local conditions can greatly affect property markets. Before making a purchase decision, speak to property brokers in the area.
- Financing options: Finally, explore your financing options. Borrowed funds can help you purchase a bigger property, but remember to build the repayments into your budget.
Due diligence process for choosing a commercial property class
Thorough due diligence is crucial in selecting a property class to invest in. Take your time and avoid the temptation to cut corners when you are checking out a new property. Here are some of the areas you need to look at:
- Property inspection: Look out for structural and construction issues. This can be an issue with a Class C building.
- Financial analysis: Determine if the investment would be financially viable for you. Will the property’s income be enough to meet all your financial obligations?
- Tenant analysis: Do the tenants have the ability and willingness to pay their rent? What does the record say? Seeking answers to these questions is especially relevant for Class C buildings.
- Market analysis: Each property market is different. It is essential to carry out an in-depth review of local conditions before making a purchase.
- Legal and zoning compliance: Are all federal, state, and local laws complied with? It is best to get professional help to answer this question.
- Exit strategy: Your exit strategy should be part of your investment plan. Before you buy the property, take the time to think about the different options. Will you sell, do a 1031 exchange, or refinance?
The bottom line
Investors must familiarize themselves with the differences between Class A, B, and C real estate. Understanding the factors that go into the categorization can help investors quickly estimate a commercial property’s potential. The property class can also say a lot about its risk/return profile.
