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What’s the Difference Between Class A, B, and C Real Estate?
Industrial real estate can broadly be placed into several different asset types based on the property’s function, including manufacturing facilities, distribution centers, and R&D labs. Beyond an asset's function, terminology exists to categorize a property by its quality.
Class A industrial properties are the highest-quality facilities in the sector. These assets are typically less than 15 years old, have been meticulously maintained, and feature clear heights of at least 32 feet. These properties are nearly always professionally managed.
While Class B industrial real estate is typically a little older than Class A, it generally is in good condition and may even be professionally managed. Although rents are lower than in Class A facilities, capital improvements could provide a significant upside for investors.
Class C facilities generally are smaller, dated properties. Usually built more than 20 years ago, most Class C assets have shorter clear heights, narrower column spacing, fewer loading docks, and significant deferred maintenance issues. Rents are far less expensive for these assets, though many are owner occupied.
Tailor Your Investment Strategy to Your Property
There’s significantly more difference between Class A, B, and C properties than meets the eye, and it is critical to understand what investment potential — and risk factors — each class of industrial real estate has.
Class A assets benefit from the strongest demand, and highest rents, in the sector. These properties typically also have the lowest level of risk, as they tend to be top of the line, requiring few, if any, capital expenditures from the outset. The risks associated with this highest-tier property class tend to stem from potential oversupply issues. However, given the strength of industrial demand, these assets generally perform well even in an economic downturn.
Class B and C properties are usually associated with higher cap rates, mostly due to a higher risk profile. These assets usually have some deferred maintenance issues and dated systems which could require significant capital expenditures to resolve. Additionally, some property features which are not easily changed — like clear heights or column spacing — could turn away potential tenants. However, lower rents associated with these older properties can be a significant attractive factor, especially in markets with rapid rent growth and strong demand.