Commercial Real Estate Blog

When considering office space, tenants will find that office buildings are generally classified as being either a Class A, Class B, or a Class C building. The difference between each of these classifications varies by market and class B and C buildings are generally classified relative to Class A buildings. Building classifications are used to differentiate buildings and help the reporting of market data in a manner that differentiates between building types. That said, there is no definitive formula for classifying a building, but in the general characteristics of each are as follows:

• Class A. These buildings represent the highest quality buildings in their market. They are generally the best looking buildings with the best construction, and possess high quality building infrastructure. Class A buildings also are well-located, have good access, and are professionally managed. As a result of this, they attract the highest quality tenants and also command the highest rents.
• Class B. This is the next notch down. Class B buildings are generally a little older, but still have good quality management and tenants. Often times, value-added investors target these buildings as investments since well-located Class B buildings can be returned to their Class A glory through renovation such as facade and common area improvements. Class B buildings should generally not be functionally obsolete and should be well maintained.
• Class C. The lowest classification of office building and space is Class C. These are older buildings (usually more than 20), and are located in less desirable areas and are in need of extensive renovation. Architecturally, these buildings are the least desirable and building infrastructure and technology is out-dated. As a result, Class C buildings have the lowest rental rates, take the longest time to lease, and are often targeted as re-development opportunities.

The above is just a general guideline of building classifications. No formal international standard exists for classifying a building, but one of the most important things to consider about building classifications is that buildings should be viewed in context and relative to other buildings within the sub-market; a Class A building in one market may not be a Class A building in another.

There is no international standard for classifying office buildings. In fact, BOMA is generally against the publication of a classification rating for individual properties. Were there a more scientific method for classifying buildings though, some of the building characteristics which could be used to compare and rank buildings would be as follows:

• HVAC Capacity
• Elevator quantity and speed
• Backup Power
• Security and life safety infrastructure
• Ceiling heights
• Floor load capacity
• Location
• Access (freeway, public transportation)
• Parking
• Construction, Common Area Improvements
• Nearby and/or on-site amenities (dry cleaning, restaurants, ATM, etc.)

It used to be that when a new owner of an office building or office park set out to “add value”, it meant getting contractors involved to make improvements to anything from upgrading lobbies and common areas to improving lighting.

Now, more and more landlords are turning to architects to help them “add value” by re-measuring buildings to the latest BOMA/ANSI standards. As the office market has rebounded, owners (particularly new ones) are taking this opportunity to re-measure their buildings and recalculate load factors and rentable square footage numbers (see the glossary for definitions).

As existing tenants look to sign new leases or renew in this market, they might find that they have to fork over more rent, both based on the healthy condition of the market, but also as a result of an increase in square footage.

One example is in Mountain View where the previous owner was leasing space utilizing a load factor of approximately 12%. The new owners have gone out and remeasured all the tenant spaces and common areas and have revised the load factor up to over 20%!

As a tenant, it is therefore important to pay attention to this trend and work to mitigate risk in this regard by: 1) measuring space upon move-in to confirm its accuracy, and 2) including language into the lease which solidifies the square footage and limits the ability of the landlord to remeasure and revise a tenant’s rent during the course of the lease.

In most parts of the country, the most common method for measuring office space and determining the gross leasable area is the BOMA (The Building Owners and Managers Association) standard. It is the most commonly used method as it provides Landlord’s with the ability to capture all common areas when calculating rentable square footage. The 1980 standard analyzed tenant spaces by floor while the 1996 method took into account the entire building’s rentable square footage.

In Silicon Valley, the BOMA standard is most commonly used while a number of office buildings use the Drip-Line method which determines the rentable square footage where the measurement is taken to the outermost perimeter of the building, regardless of whether it is enclosed or not.

In addition, there are some methods of measurement based on regional standards. Two of these regional standards are the REBNY and GWCAR methods, which are commonly used in the New York City and Washington D.C. area, respectively. The REBNY method attempts to bring the rentable square foot number as close to the gross built area so that they can maximize profits.

Regardless of what measurement method is employed, it is advisable that tenant’s perform proper due diligence before executing a lease to ensure they are getting what they pay for. While smaller tenants may not have the leverage that a 100,000 square foot user has, they should ensure that the rentable square footage of their space is at the very least within close proximity of what the landlord is quoting.