Classes of Industrial Real Estate

Commercial buildings are divided into classes based on age and amenities; Class A, Class B and Class C. An asset’s class designation can determine whether capital appreciates or is preserved.  The rate of ROI will be determined by the amount of net income it can generate.

Class A Industrial

Class A industrial buildings are newer buildings, generally no older than 10 years.  Class A industrial real estate is the highest level of quality among the three industrial building classes. Typically, these are the newest properties, possessing the latest state-of-the-art design, architecture, technology, and amenities.  They are the best-quality structures that exist in the market. They can also be the priciest as well.

Because Class A industrial spaces are first-rate, they usually possess high-income earning tenants and experience low vacancy rates. Rarely are there outstanding issues with these properties, which alleviates the necessity to consistently make maintenance investment into the asset.

Standard qualities and characteristics in this structure include many loading docks, a logistically prime location (e.g., freeway/interstate adjacent), soaring ceiling heights and plentiful parking. Class A industrial property is highly preferred by prominent, corporate occupants like online retailer Amazon and hybrid (e.g., online and brick-and-mortar) retailers such as Target.

Finally, Class A industrial real estate is generally priced higher with lower CAP rates. Class A assets, despite their upfront expense, present lower risks to investors and can be an excellent way to preserve or passively invest capital.

Class B Industrial

Class B industrial properties are typically more mature structures. Class B industrial properties can also be brand-new structures without modern amenities typical of Class A industrial buildings. For example, Class B industrial property (that has not been upgraded) might have lower ceilings and fewer loading docks, built with older materials and windows with outdated functionality.

Class B industrial property rent is usually below that of Class A industrial buildings.  Even so, Class B industrial structures are typically very well-maintained, and can present a suitable “fixer-upper” opportunity.  These properties are regarded as “value-add”. With the appropriate makeover and improvements, a Class B property can be transformed into an A or B+ class building.

Class B industrial properties have a higher risk of experiencing vacancies than Class A buildings.  If the property is situated in an attractive setting, an investor in need of a fast income stream could secure a lease, building equity while holding the asset until the land upon which it is built appreciates.  

Class B industrial real estate typically interests small-scale, more locally-based occupants as opposed to commercial conglomerates.

Class C Industrial

Industrial buildings that are 20+ years old are classified as Class C buildings.  These buildings are usually in need of significant renovation.  Class C buildings typically have low ceilings, few amenities, out-of-date technology, and a small number of on-site parking spaces.  Class C buildings can be distanced from major arteries and are in less desirable locations than Class A and Class B buildings.

Predictably, Class C buildings generate the lowest rental rates in the industrial real estate market, making passive investment opportunities less obtainable. For an investor that puts in the time, capital, and ingenuity however, Class C industrial properties can be transformed into higher worth assets.

If a Class C property owner is also the building’s end user, improving the building can present a great business opportunity. The upgrades will not only assist the business operation but add value to the property as well.