The 3 Classes of Office Buildings: A Dottid Guide
So you’ve decided to add office space to your portfolio—but where should you begin? Depending on your other commercial real estate (CRE) investments, you may be interested in any of the three types of office buildings. From a swanky, amenity-rich high rise to a humble neighborhood corner office, we’ll explain the differences between Class A, B, and C offices to help you weigh the risks and benefits of investing in each type.
How are Office Classes Determined?
There is no official categorization method to determine what class an office space falls into. Factors that inform this determination include location, broker systems, architecture, and building infrastructure. But while these and other aspects are part of the categorization method, some basic tenets make up each class and its features. We’ll summarize each asset class and provide a risk/benefit analysis to help you determine which may be the best fit for your portfolio.
Class A Office Space
If you’re wondering what a typical Class A office looks like, picture your central business district (CBD). Class A offices are often located in modern high-rises, loaded with state-of-the-art amenities, high-end finishes, and top-notch facilities. They may offer services like in-building daycare, fitness centers, and restaurants. You’ll probably notice elements of luxury like marble bathroom counters, smart mirrors, and granite flooring in these locations, too.
Class A offices aren’t limited to high-rise locations, though. Many companies now operate on full campuses, many in suburban locations with proximity to shopping, dining, and services used by employees. Both of these property types offer their benefits but come with investment risks.
Benefits of Class A Office Space
High Demand: Their amenities and high-visibility locations make Class A offices highly sought-after, especially for companies and industries with a commitment to culture and those who regularly host customers on-site.
Modern Facilities: Since Class A offices are typically newer, well-maintained locations, they’re attractive to tenants who value quality and reliability. They sometimes even offer sustainability benefits thanks to their state-of-the-art systems.
Prestige Bonus: Typically located in high-traffic areas, surrounded by other well-known and successful enterprises, the locations of Class A offices can help enhance a company’s image and attract high-quality tenants to your building.
Risks of Class A Office Space
Higher Costs: All those bonus amenities and facilities come at a price, including potentially high upfront costs and high rent—which could make it more challenging to find tenants quickly.
More Competitors: Many investors are interested in Class A office space, which can drive up prices and make it more difficult to secure the deals you want.
Class B Office Space
Class B offices may be found in older office parks, suburban areas, and similar locations. They’re a bit of a step down from Class A, but that’s typically due to a lack of optional features rather than the essential quality of functionality in the space. They’ll still have amenities like conference rooms, break rooms, and simple food options. With cost-effective accessibility for practical-minded tenants, Class B offices are a great option for small businesses, startups, nonprofits, professional services, and government operations.
Benefits of Class B Office Space
Lower Upfront Costs: Class B office space is typically less expensive than Class A, meaning lower rents and upfront costs, making it accessible for more tenants and investors.
High Rental Demand: Class B buildings are generally well-located, with good accessibility and nearby services, making it easier to attract quality tenants.
Risks of Class B Office Space
Maintenance: While generally well-maintained, Class B buildings are older than their Class A counterparts and may require more maintenance and upgrades to keep them up to par.
Prestige Questions: Located in secondary or suburban areas, Class B buildings may not have the same level of prestige and may not attract as high a level of clientele when it comes to tenants.
Class C Office Space
Class C offices may be smaller, older buildings, sometimes located in less-desirable city areas. They may not be as well-maintained as their Class A and B counterparts, so they’ll likely need some revisions or renovations before they’re up to operating standards. Additionally, the demand for these spaces may be lower depending on the area. The good news? These spaces typically have reasonably affordable rent, opening them up to a new tenant group.
Benefits of Class C Office Space
Cost Effective: Typically offering the lowest upfront costs and rent of any class of office space, Class C is the least expensive and the most accessible for investors and tenants.
Convenient Locations: Class C spaces are often located in urban or suburban areas, with a diverse mix of tenants and local businesses. What they may lack in sophistication, they make up for in affordability and accessibility.
Risks of Class C office Space
Older Infrastructure: Many Class C buildings are outdated and may require significant renovations to bring them up to your standard. They may also have increased maintenance costs to operate older systems.
Vacancy Rates: Class C buildings typically have higher vacancy rates than their counterparts. Competition is challenging, with landlords competing for tenants with upgrades and amenities. While the locations of Class C offices may be convenient to employees, they often pose a challenge for visibility, leading tenants to search elsewhere to grow their business.
Which Types of Office Buildings Suit Your Portfolio?
Whether you’re just starting out, building your mid-career portfolio, or looking to add some more prestigious assets to your book, any of the three types of office buildings are worth considering. As you assess your investment goals, determine whether you want to expand into different categories of property—if you’re looking for stable, long-term cash flow, Class B may be a good option. If you want to grow your image and gain prestige, Class A may be the best fit. And if you’re working with a limited income or a market with many low-income businesses (like nonprofits, government entities, etc.), Class C may be your best option. You can work with a real estate professional to help you determine which assets would most benefit your portfolio.
Managing Your Assets
No matter which office class you decide to invest in, Dottid’s technology offers a streamlined workflow from the beginning of a deal all the way through those improvement projects. Call us to learn more or get a demo today!