Commercial properties are typically classified as Class A, Class B, or Class C. While the lines are blurry and precise terminology is often market-specific, the class distinctions serve as a quick way to convey a property’s overall desirability.
Class A properties are the cream of the crop in your market. They’re usually relatively new, constructed of high-quality materials, and located in a great area. Naturally, Class A buildings command the highest rents in the market.
However, none of these rules are hard and fast. For example, a downtown office tower could be the premier Class A building in your market despite being 50 years old.
Side note: it’s not unusual for buildings to be marketed as “Class A” when everyone knows it’s really a Class B building, for example, and same goes for Classes B and C.
Class A Example
We’ll use a retail example to illustrate the different classes of commercial space, but the same principles apply to office and industrial properties, as well as residential.
A good example of a Class A retail property is Short Pump Town Center in Richmond, VA.
Located along a highly trafficked commercial thoroughfare (W Broad Street) within arguably the best retail submarket in the Richmond MSA, Short Pump Town Center is a high-end center in excellent condition with quality finishes and a strong rent roll; tenants include retailers like Athleta, Dick’s, J. Crew, Peloton, Apple, Starbucks, and other notable brands.
The center commands some of the highest rents in the region given its desirability, and it’s unquestionably a Class A property.
Class B properties are usually good, solid buildings in a good area. They may have once been considered Class A prior to being demoted to Class B due to their age.
However, a newly constructed building can also be considered Class B if it’s construction materials and finishes are not quite at the highest level, for example, or if the property’s located in a slightly less desirable submarket.
Class B Example
Sticking with the Richmond retail theme, Merchants Walk Shopping Center is a good example of a Class B shopping center.
Similar to Short Pump Town Center, Merchants Walk is situated along W Broad Street, though it’s a few miles to the east in a less desirable submarket. Some of the storefronts within the center are visible from W Broad, though many of them are not, and the property is in average condition having been constructed in the early ‘80s.
This center has some solid national tenants, though not luxury brands, including JOANN Fabrics, Food Lion, Marshalls, and CiCi’s Pizza.
This is probably clear by now, but Class C properties are typically older buildings located in less desirable areas. They typically need some TLC, but command the lowest rents in the market.
If you come across a space being marketed as Class B but it’s old and has some functional obsolescence along with a mediocre location, it’s probably Class C.
Class C Example
Last but not least, Richmond’s 360 West Shopping Center is a good example of a Class C property.
360 West is an older property (built in the ‘60s) in fair condition in need of some physical improvements, and it’s located in an average retail submarket. The rent roll consists of primarily local, non-credit tenants or discount retailers like Dollar General.
Given its age, condition, and less desirable location, this Class C center commands rents toward the lower end of the range relative to the overall Richmond market.