Property is a very large industry, generally broken down into residential and commercial real estate, but that isn't the only way real estate can be categorized. Property professionals also use a quality assessment to differentiate properties by class. Class A is seen as the highest quality, followed by Class B and Class C in descending order.
The property sector is a major component of the U.S. economy, and while your first touchpoint for a deal might be an agent or real estate broker, the sector includes thousands of professionals. Although there is no universal checklist of what it means to be a Class A property, these professionals, through their collective wisdom and experience, have helped to produce a relatively consistent description of what defines a Class A property.
What is Class A property?
As a general rule, for a real estate asset to be designated Class A property, it needs to have the following characteristics:
- It needs to be of the highest quality.
- It needs to achieve high rents and prices.
- It is often new, meaning less than 15 years old.
- It should be well maintained and be in a desirable area.
For residential property, a desirable area commonly means:
- Low crime.
- Plenty of green space.
- Good school districts.
For commercial property, a good location generally means:
- Being located in a central business district (CBD).
- Having good transportation characteristics, such as mass transit or easy access to expressways.
- Being located near good amenities, such as restaurants and service-sector firms like banks and law firms.
Differences between Class A, B, and C properties
If a property professional had no information other than rents or prices for properties in a specific area, they could put those into general categories of average, high, or low. Those with average rents or prices are generally going to be considered Class B, while those toward the top of the range could be considered Class A and those at the other end of the spectrum could be Class C.
This categorization system isn't fool proof, but it is a good rule of thumb. The descriptions below help explain beyond just prices what parameters help decide how properties are classified, but don't be surprised when speaking with real estate agents if they anchor toward price when defining a property's class.
There is a reason most professional sports players retire before they reach forty. They generally still have the fundamentals, but age brings with it wear and tear. The same is true with real estate. Although age itself is not an absolute factor that determines a property's class, it is often an important item that may disqualify a property from gaining a Class A designation.
Older infrastructure systems like elevators or HVAC (heating ventilation and air conditioning) systems can make it easy for an investor to identify shortcomings. Other items could include loads of deferred maintenance or just a critical mass of small defects that weigh down a building's ranking.
Class A and Class B properties often share many of the same fundamentals, but Class A properties are often newer and have more polish. Class C properties, though, are just generally all-around weaker. The challenges for a Class C property aren't usually just a lack of maintenance. Properties considered to be Class C are often located in neighborhoods that have higher crime rates, underperforming schools, and a lack of amenities and may have poorer transportation links.
Instead of having solid tenants providing consistent passive income to their owners, they are likely to have higher vacancy rates and may be short-term rentals. And, as noted above, those rents usually fall toward the lower end of the scale.
Yes, there are even certain types of property lower quality than Class C. It is worth noting that here we are talking about investable property. Generally, there is an active market for Class A, B, and C property. Cities ravaged by a collapse of their employment base or a series of natural disasters may have plenty of property that would be considered below Class C.
Building class definitions
|Class A||Efficient design, latest technology, newer||Great schools, low crime, concentration of good employers, lots of green space||Multiple options for dining and entertainment|
|Class B||Good fundamental construction with elements in need of upgrades||Good neighborhoods and schools, decent employment options||Adequate options for meals and entertainment, stable business environment|
|Class C||Subpar construction, outdated infrastructure||May have issues with crime, lower quality schools, lack of major employers||Limited restaurant and entertainment options, fewer businesses and employer base|
Benefits of investing in Class A real estate
Whether you are buying stocks, suits, or cars, you can hardly go wrong buying the best quality. The same is true with investing in real estate. And just as some people only buy luxury cars, some investors only purchase Class A real estate. The assumption here is that while they may pay a high price, they should also be getting good quality and hopefully some solid rental income.
Knowing just the class of a property is going to give you a good initial sense of what its surrounding neighborhood, amenities, and transportation links are probably like. A Class A designation should also indicate the presence of the latest design features and technology. Your maintenance budget should also be lower than if you were to invest in a Class B property.
A Class A property is often considered a good investment because it should appeal to tenants and so have more consistent rental income, and if the owner decides to sell, it should appeal to a large group of potential investors. Particularly in the commercial real estate market, a number of institutional investors, such as real estate investment trusts (REITs) or pension funds, will want to invest in Class A real estate because it is considered to have a steady income. As an example, shopping malls in nice neighborhoods often have not only full parking lots but also a long list of retail tenants looking to secure a lease.
How to change a property from one class to another
It's rather common for Class A properties to become Class B. The same is sometimes true for Class B properties going to Class C. So, we know property can be downgraded, but can buildings also move up the property classifications? Sometimes this may be possible through some combination of investment and marketing.
Regardless of whether the target is private property like a home, a multifamily property, or an office building, how can you decide which properties have upgrade potential? There is not much you can do about a bad neighborhood or lack of local employment base, but conduct a quick assessment and focus on factors that you might be able to change. This could include replacing a roof, adding insulation, or improving the surrounding green space.
There are several advantages to upgrading property. Sometimes the property values of lower-class real estate make for a low initial investment, but be careful not to overlook the costs of doing a major refurbishment. Other times governments will offer incentives to attract investors to acquire and improve local real estate. In a number of cases, the government may have even designated an area as an empowerment zone or opportunity zone and have a clear set of criteria to qualify for government subsidies or tax breaks. This can help mitigate risks associated with investing in a lower-quality project.
If you are considering investing in a property and trying to upgrade it, you'd best meet with several real estate professionals. Industry players such as brokers, valuers, and consultants can give you suggestions about locations with potential and give you tips on what sort of upgrades can be the most efficient to help you achieve higher capital values, a term investors use to refer to property prices.
Being successful as a real estate investor means knowing the definitions real estate agents and other property professionals use. Familiarize yourself with the broad real estate asset classes defined by a property's use, and remember the broad parameters for defining Class A, B, and C property, which define its relative quality.
Some professional real estate investors, such as REITs, may focus primarily on investing in Class A property, but there are also opportunities to upgrade lower-class properties.
If you are considering upgrading a property, first do an assessment of what factors can be changed, try and estimate what those improvement costs might be, and consult a property professional for their suggestions and tips before you begin implementation of your plan.
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