Real estate is a very large industry, that’s why it is generally broken down into two large categories which you’ll probably have heard about by now: residential and commercial property.
However, that isn’t the only way real estate can be categorized. Industry professionals also use an assessment for quality to differentiate assets by class. Class A is seen as the highest quality, followed by Class B and Class C in descending order.
Although there is no universal checklist of what it means to be a Class A property, industry leaders and professionals, through their collective wisdom and experience, have helped to produce a relatively consistent description of what defines a Class A property.
Defining Class A property
For a real estate asset to be designated as Class A, the property needs to have the following features:
- Is very high quality.
- Achieves high rents and prices.
- Is a recent development, meaning less than 15 years old.
- It’s well maintained and in a good location.
For residential property, a desirable area commonly means:
- Low crime.
- Lots of green areas.
- Good school districts.
For commercial property, a good location generally means:
- Being located in the commercial and business center of a city.
- Having good transportation, and roads that facilitate access.
- Being surrounded by good amenities, like restaurants and economic and business firms like banks, consulting, and law firms.
Differences between Class A and other property classes
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Most real estate professionals start by looking at prices and dividing them into general categories like “low”, “high” or “average”. It’s a categorization system that isn’t fool-proof but serves as a good rule of thumb.
Under that rule, assets with average rents or prices are considered Class B, while those at the top of the range are Class, and those at the other end of the scale are Class C. However, there’s more to it than simply looking at the price, so let’s explore what other characteristics and parameters are considered when deciding how properties are categorized.
Class B property
Although age itself is not an absolute factor that determines a property’s class, it is one of the most important items, to the point that may disqualify a property from entering the Class A designation.
Older infrastructure systems like elevators or HVAC systems can make it easy for an investor to identify shortcomings. Other items could include loads of deferred maintenance or just an accumulation of small problems that weigh down a building’s ranking.
Class C property
Even though Class A and B properties share many of the same features most of the time, Class A properties are newer and more polished. However, this is not the case for Class C properties, which, generally speaking, are just all-around weaker.
The challenges for a Class C property aren’t usually just a lack of maintenance; they are often located in dangerous neighborhoods, with underperforming schools, and a few or no amenities at all. They also might have poor roads and non-optimal transportation links.
Another factor to consider is the type and quality of tenants, who could be unable to provide consistent passive income, as they would prefer short-term rentals. This would result in higher vacancy rates, which is also detrimental to the value of an asset.
Investing in Class A real estate
A general rule of thumb for seasoned investors is that you can hardly go wrong buying the best quality. Just as some people only buy luxury cars, some investors only purchase Class A real estate. While they may pay a high price, they are getting the possibility of achieving good quality and hopefully some solid rental income.
Class A properties are considered a good investment because they appeal to tenants, which translates into the possibility of producing more consistent rental income. Also, in case the owner wants to sell it, it becomes a desirable investment opportunity for a large group of potential investors.
In the commercial real estate market, a good example would be shopping malls in nice neighborhoods, which often have full parking lots and a long list of retail tenants looking to secure a lease.
The bottom line
Achieving success in the real estate industry requires knowing the widely used definitions that other real estate investors, agents, and professionals use. By knowing and familiarizing yourself with the real estate asset classes, even in a broader sense, you would set up your investing career many steps forward.
Class A properties are an excellent investment vehicle to produce strong and consistent cash flow in both commercial and residential real estate, meaning a large selection of properties that range from high-quality multifamily assets to commercial buildings in strategic locations.