The ABCs of commercial real estate

Mike Kushner is the owner of Lower Paxton Township-based Omni Realty Group - (Photo / Submitted)

You are likely aware that there are different classifications of office space, specifically Class A, B and C.

But what qualities determine the letter associated with any given commercial property? Is it the location, the layout, the finishes or the amenities?

The answer is it has to do with all of these things.

The classification of office space is very important to keep in mind both as a real estate investor and as a business tenant. Your budget and use of the space will help determine the class best suited for your needs. When looking to rent or buy commercial real estate, you can save a lot of time and frustration by teaming up with an experienced tenant representative or buyer agent who can advise you on the most appropriate class.

Class A

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Overview: As you might expect by the name, Class A office space is considered extremely desirable, investment-grade properties and command the highest rents or sale prices compared to other buildings in the same market. These buildings are in prime locations with efficient tenant layouts that function as well as they look. Some Class A office space is an architectural or historical landmark designed by prominent architects. Simply put, Class A office space is for the renter or investor who wants the highest level of quality and convenience and is willing to pay a premium for it.

Pros: With Class A office space, you know you’re getting the best — the best location, layout, finishes and amenities. You are likely to have other desirable businesses as your “neighbors” in the same building, which can increase the value of your space. You can also rest assured knowing the space will be well maintained for the premium price, meaning less headaches or inconveniences for you in the long run.

Cons: This class of space comes with the highest rent or sale prices. You may also have less negotiation power since the space you’re getting is usually in top condition with every advantage to drive the price high — including many businesses who are eager to jump on the space if you don’t.

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How it relates to the local market: The Central Pennsylvania submarket has 93 existing buildings that are classified as Class A. Combined, that’s a total rentable building area of 8,820,990 square feet. After submarkets in Philadelphia and southern New Jersey, Central Pennsylvania is the submarket with the lowest vacancy rate in CoStar’s Philadelphia Office Market Area, coming in at 9.9 percent in first quarter 2016. The average asking rental rate for the first quarter is $19.78, which is the third lowest rate in the market area.

Additionally, it’s worth noting that just because two buildings are both considered Class A, it does not mean they are equal. This is all the more reason to work with an experienced tenant representative who can help you find the best space at the best price to meet your needs.

Just take a look at the example of the two buildings in the Central Pennsylvania submarket pictured. Both are Class A, but for which property would you be willing to pay the premium price?

Class B

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Overview: Class B office space is a step down from Class A space in its location, design, quality and amenities. As such, this space carries a lower price tag. Class B buildings offer utilitarian space without special attractions and have “ordinary” design, compared to Class A. These buildings typically have average-to-good maintenance, management and tenants. They are less appealing to tenants than Class A properties, and may be deficient in a number of respects including floor plans, condition and facilities. They lack prestige and must depend chiefly on a lower price to attract tenants and investors.

Pros: Since Class B office space is “middle of the road” for the classes, you have the advantage of getting a better work environment than Class C for a price that’s less expensive than Class A. As an owner or investors of Class B space, you’re likely to find many tenants whose budget and expectations align best with Class B space.

Cons: On the flip side, Class B space has several drawbacks to consider for the cost savings. It’s not likely to be in as prime of a location as Class A nor have the same amenities and quality of finishes. You may find the layout to be less convenient and the building and its other tenants to be “less prestigious” than Class A. 

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How it relates to the local market: The Central Pennsylvania submarket has 1,303 existing buildings that are classified as Class B. Combined, that’s a total RBA of 28,378,254 square feet. With a vacancy rate of 7.7 percent in first quarter 2016, it is the lowest of any submarket in CoStar’s Philadelphia Office Market Area though its average asking rental rate is only the third least expensive at $17.36, coming in higher than the Interstate 81 corridor and southern New Jersey. If you find it overwhelming to understand and interpret the local market trends, a tenant representative/buyer agent can guide you with knowledge and expertise. He or she knows how these trends impact demand and pricing and can use it as leverage to help you negotiate the best deal.

Pictured are two examples of Class B office space so you can see the variations within a single class.

Class C

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Overview: Class C office space describes buildings that generally qualify as no-frills, older buildings that offer basic space and command the lowest rents or sale prices compared to other buildings in the same market. Such buildings typically have below-average maintenance and management, and could have mixed or low tenant prestige. Things like inferior elevators, mechanical or electrical systems help reduce the cost, but also increase the possible headache for tenants. These buildings lack prestige and must depend chiefly on a lower price to attract tenants and investors.

Pros: The biggest benefit of Class C office space is its low price in comparison to Class A and B. If you’re looking for a simple and understated work space with zero frills, Class C might be a great option to help you stick within your budget while still gaining the space you need to grow your business.

Cons: When looking at Class C space, you need to keep your expectations in check. This is the lowest of the classes and likely to offer the least desirable work conditions as well. There may be things that need obvious repair, the building and its location may leave a lot to be desired and your neighboring tenants are not likely to be prestigious businesses. Having said that, sometimes you can get lucky and find a Class C space in an area that still has “good bones” and a lot to offer the right business. It’s always important to keep an open mind, especially when working with a limited budget.

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How it relates to the local market: The Central Pennsylvania submarket has 2,162 existing buildings that are classified as Class C. Combined, that’s a total RBA of 16,600,363 square feet. With a vacancy rate of 5.1 percent in first quarter 2016, Central Pennsylvania has the second-lowest vacancy rate in CoStar’s Philadelphia Office Market Area. Its average asking rental rate for the first quarter is $14.99, which is the second-lowest only to the I-81 corridor.

Pictured above are two examples of Class C office space so you can see the variations within a single class. Depending upon your requirements, Class C office space might be just what you need, but make sure you work with a real estate broker who exclusively represents tenants and buyers to ensure you’re getting a fair and favorable deal.

Mike Kushner is the owner of Lower Paxton Township-based Omni Realty Group.

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