Class A…or Just Classy?

You have a nice building – a great building, actually. Lots of parking, good location, a fancy tap that dishes out on-demand cold brew, and credit tenants. Is this class A…or just classy?

The term “class A” gets thrown around a lot in Montana commercial real estate. We assume no malice but the fact of the matter is that very little commercial product statewide meets the general industry standards for class A space.

Context matters when classifying buildings. If a brand new build with state-of-the-art systems and high lease rates is constructed across the street from a class A building, that formerly class A building could become class B simply because it no longer has the highest rents in the neighborhood. A renovated class C building in a primo location can become class B or even class A with the right upgrades.

But without a solid set of definitions for each class, it’s understandable why some confusion lingers. So, what qualifies as “class A” space? And where can you find it in Montana?

Class A

Exceptional amenities, downtown/CBD (central business district) location, and high end-construction most often set class A product apart from the rest of the buildings on the market. Common amenities include electronic controlled access systems, a dedicated building manager, and a market presence (per the Building Owners and Managers International group).

Part of the distinction of Class A space is that it must have an element of beauty. It has to make a statement. That means large and well-appointed common areas, strong architectural design, and the best-in-class elevators, HVAC systems, and interior lighting. With class A product there is no cutting corners.” – Connor McMahon, SterlingCRE Advisors

Frequently, a new building will automatically be billed as class A space. But just because it’s new, it may not have a manager, amenities, or the finishes required to be class A. For example, a new building with mid-grade finishes and simple keyed entry wouldn’t be considered class A space. Some buildings may be considered class A in the right area, but land outside key business districts.

In Montana, the First Interstate Building in Missoula and the Osborne Building in Bozeman are the most likely contenders to rank for class A space. Both properties are new builds with high-end finishes, optimized for stunning downtown views and complete with secure access. They also have dedicated professional management, a key feature of class A space (however, limited parking at both buildings could be considered a knock against class A status).

Importantly, these buildings demand the highest rents in the market – largely because they can. No other building will be able to compete for tenants who desire next-level services like 24/7 secured retina-scan access, heated walkways, or an on-site gym.

Class B

In Montana, class B is likely a more accurate commercial asset classification for a well-built, amentizied facility. And that’s not at all bad. Class B buildings generally have good tenants, good management, and can be a solid investment. Usually, finishes are a little below class A or might be dated. Buildings have well-functioning systems and aren’t in need of maintenance.

A brand new building might be considered class B based on location, finish, or even tenants. Generally, pricing on class B buildings will be more in-line with market standards, which makes them more attractive to a diverse group of users. Class B buildings also have the potential to be upgraded to a class A standard with a substantial remodel.

And, class B product may be in a less-trafficked part of business districts or fall just outside these main thoroughfares.

Class C
First off, let’s clear something up. Class C buildings aren’t automatically assumed to be dilapidated or in ill-repair (though they definitely can be). They are most often older – but may remain functional but with strategic maintenance and renovation.

Class C buildings also attract investors looking for low acquisition cost and value-add potential, especially if the asset is in a good location. However, the due diligence period for class C properties can uncover small issues (lack of ADA compliant facilities) or much larger problems (needs new electrical, water, or HVAC systems).

These facilities lack two major components of class A and B product: amenities and professional management. Sometimes, the tenant mix has deteriorated or has leases with very outdated terms. Those leases can start to impact the Net Operating Income of the building. Ultimately, they can make it a less desirable investment property.

Takeaway

Class A space is hard to find in Montana, though it’s becoming more common. Consult with a local broker to properly assess your space. An accurate assessment can result in clearer expectations for tenants or investors. In turn, that leads to a smoother and more mutually beneficial agreement.

For a clear assessment of your space, contact Connor McMahon at 406-370-6424 or via email.