Do you know how to define the class of an office building? Learning how to define the class of an office building is crucial so you that know how to appraise it properly. Get more information on this topic by reading this article.
The class of an office building is defined by the building's characteristics. Let's discuss this is further detail.
Class A Buildings
To categorize a structure as a Class A building, it must be brand new
or, at the very least, have been built in this current building cycle.
It has all the bells and whistles that the best buildings in town
include. It’s typically downtown, usually a high-rise, and it has no
functional obsolescence. Best of all features, it has the highest rent
tier. Currently in Orlando, Class A buildings are between $25 and $30 a
square foot, while Class B buildings are between $18 and $23 a square
foot. Notice the gap of a few dollars between those two tiers—that’s
typical in your community, too. You know the class of a building
instantly by the rent per square foot as compared to other building
rents.
Class B Buildings
Class B buildings are usually over eight years old or older, depending
on your neighborhood. If the current building cycle you’re in is only
three to four years old, then a five or six-year-old building might be
Class B. Essentially, it’s not the age of the building that is so
important, because buildings don’t age quickly. It’s the systems within
these buildings.
If it’s a five-foot hallway instead of six feet, that’s a Class B
building. People will feel that way about it, because nobody built
six-foot hallways until fairly recently. Now, if they were like hospital
corridors with that extra one linear foot, it just feels so much more
luxurious.
Class C Buildings
In Orlando, a Class C building would be more than 17 to 20 years old.
This is an example, and remember that drops in class will be different
based on the building cycles in YOUR area. This is very important to
understand when trying to define the class of an office building.
A Class C building would have additional and certainly more functional
obsolescence than a Class B building. Functional obsolescence will also
be found in areas like the hallways, where you would have 4 feet or less
of hallway. When you have a building with 3- 4 foot hallways, you feel
closed in, since you are so used to the newer buildings having five and
even six foot hallways.
If no buildings during the last building cycle were built in your town
with six feet hallways and you walked into a building like that, you
would be surprised at the impact that it has on the visitor. It doesn’t
cost the builders much to do that, but it lends an upscale feeling to
the building.
Class C buildings are older, with lots of functional obsolescence and
with systems starting to wear out. Maintenance on a Class C building
costs a great deal more than the other two categories.
When the restrooms are between floors, it’s a hard thing to fix because
you have to go up or down half a flight of stairs to get there,
typically by using the fire stairs. Not only is that not ADA compatible,
but it’s inconvenient and outdated. That particular functional
obsolescence immediately marks the building as Class C.
Investment Issues
You may own some buildings you would have to classify as Class C
buildings, if you are going by their age. However, they may still
command high Class B-rate rents. This difference just depends on how you
maintain your property. Right now, if you buy a Class A building in
Orlando, Florida, you would pay the equivalent of a 6 % “Cap Rate”— in
other words, you should not buy one because there’s more bang for your
buck as of this writing in older buildings.
It is not an economically sound investment. However, you can do fairly
well with a Class B building. If you buy it on a 9% “Cap Rate”, the
investment will most likely produce cash flow for a substantial period
of time.
Tip: Office buildings last for decades and more, especially if they are
built correctly. Therefore, the biggest bang for your buck is from the
Class B building, because it will be that class for a long time if it’s
well-maintained.
Keep in mind that the class of an office building is defined by it's
characteristics and not just by when it was built. I hope this
information will help you broaden your knowledge on how to define the
class of an office building.
One
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began his real estate career in Honolulu in 1966, selling land and
homes as head of one of Hawaii's largest brokerages, and has now sold
and leased real estate in Idaho, Virginia, Puerto Rico and Florida.
For the last 30+ years Mr. Tharp has been one of the leading
commercial investment real estate brokers in Orlando, Florida and a
nationally known mentor. Gary is widely regarded in commercial real
estate, having developed tools and systems of commercial property
evaluation that have become industry standards used by professionals
nationwide. With development experience ranging from office
buildings to industrial parks, Gary is Florida Partner for the Lynxs
Group, national developer of air cargo facilities, Fellow of the
faculty of the CCIM Institute, and Board of Advisor with HIS Real
Estate Network, a residential
and commercial buying group.
