Class A properties tend to be extremely desirable, investment-grade properties with the highest quality construction and workmanship, materials and systems. They often contain unique architectural features, utilize the highest quality finishes, and utilize first rate maintenance and management. Class A properties are also distinguishable by the tenants they attract. Most Class A properties will be occupied by prestigious, credit-worthy tenants that are willing to pay above average rental rates on longer term leases. Class A properties are frequently bought and sold by national and international investors, including institutional investors such as life insurance companies and pension funds, who are willing to pay a premium for quality assets.
There are several benefits to owning or investing in a Class A property. The most obvious benefit is the ability to attract high-quality, credit-worthy tenants that are willing to pay higher rents. The desirability of Class A buildings means that they provide more liquidity than Class B or Class C properties. In other words, there is enough consistent interest in purchasing Class A properties that an investor can expect to have an easier time selling the property than if they were trying to sell a Class B or Class C property in the same market.
Class B properties tend to offer more utilitarian space with fewer amenities than one would find in a Class A building. It will typically have ordinary architecture design and structural features, with average interior finishes, systems, and floor plans. The systems will be in adequate condition and the property will be structurally sound, but not overwhelmingly impressive. Generally speaking, the older the property is, the more likely it will the designated as a Class B property. However, there are examples of older buildings that maintain a Class A designation.
The maintenance, management, and tenants in a Class B property are considered good (but not necessarily great). Class B properties may also be less appealing to tenants, in general, as the buildings may be deficient in a number of respects, such as ceiling heights and building or facility condition. Tenants that leased space in a class B building tend to be be less established, have lower credit, or may be unable or unwilling to sign a long-term lease. Therefore, while Class B buildings tend to attract broad interest among a wide range of users, the rents these tenants are willing to pay tends to be less than a Class A property can command.
Class C properties are not for the faint of heart. Although acquisition costs may be lower, the properties often have deferred maintenance, high tenant vacancy rates, low existing cash flow, and few amenities that can be monetized or marketed to prospective tenants. As such, Class C property investors will typically need to make significant capital investments upon purchase and will usually need high maintenance reserves in the event further repairs and improvements are needed. That said, while Class C properties typically command lower rents than Class A and Class B properties, they are usually marketable to a wide range of users. A no-frills Class C office building, for instance, may be easily converted to flex space to accommodate a lab company looking for office and R&D capabilities.