Real EstateClassifications
What's in a Class
You will often hear real estate described by its class, either Class A, Class B, Class C or Class D. In a bit of an oversimplification, this is a grade of how “nice” the property is. A brand new, high-rise office building in New York city is a bona fide “Class A” building. A rundown warehouse in a high-crime neighborhood is probably “Class D”. These classes are somewhat related to the risk/return profile of buying the property as an investment, but not necessarily. Let’s take a closer look.
The Classes
Class A – think new and fancy. Class A buildings are typically no more than 15 years old and in prime locations. Their designs match this mold, with high end finishes and amenities.
Class B – I think of Class B as “almost Class A”. These buildings are missing one or two elements that would otherwise make them Class A. The building may be a bit older, or perhaps it’s relatively new but in a less-than-prime location.
Class C – if Class A is a new Mercedes, Class C is lightly used Honda Civic. These tend to be buildings that are over 25 years old in less expensive locations, and usually there are at least few maintenance issues.
Class D – similar to Class A, you know Class D when you see it. It’s Class C but with some other serious issue, which could be deferred maintenance, persistent crime issues, etc.
What Does it Mean for Investing
There’s a tendency in the industry to assign risk/return profiles to each of these classes. There is some wisdom in this exercise. The average Class A investment is safer than average Class D investment. But overall, it’s not a great rule of thumb. Investing in an empty Class A office building can be a very risky investment during a recession, when the building may sit vacant for months. Alternatively, if you can find a Class D building that can be renovated into a Class B building, you might be able to create an investment that is more stable and more profitable than a typical Class A investment. It’s best to use the classes to describe the physical characteristics of what you’re investing in, rather than to describe of the type of investment you’re making.
It’s best to use the classes to describe the physical characteristics of what you’re investing in, rather than to describe of the type of investment you’re making.
More Insights
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posted 2/18/2022
