To distinguish between buildings and justify differences in rental rates, the Commercial Real Estate Industry uses an A, B, C grading system. This explains the grading criteria for Office Buildings and why an Office Tenant should upfront pay close attention to Landlords’ Common Area Factors.
Class A buildings compete for premier Office Tenants and their Landlords quote above average rental rates for their submarket area. For example, in Denver’s Lower Downtown Submarket (“LoDo”), Class A asking rates now are averagely $39.59/RSF gross/full service per year.
These properties have high quality standard tenant improvements (“TIs”), state of the art building systems (such as for HVAC, security and communications), exceptional accessibility, a parking garage and definitely a high profile presence in their submarkets.
On-site property management is a requirement, as well as having on-site amenities, like food and beverage service, common conference room, shared Wi-Fi connection, fitness room and/or tenant storage areas.
CLASS B BUILDINGS
Typically this is the most prevalent grade for Office Buildings in a submarket. Class B Office Buildings attract a wide range of Tenants and are less expensive per RSF than Class A properties. In Denver’s LoDo Submarket, for example, Class B asking rates now average $33.07/RSF gross/full service per year. That’s $6.52/RSF per year or 16.5% less than Class A Office Buildings located in the same submarket.
Tenant improvements in Class B buildings are typically of lesser quality than in Class A properties. Building systems are sufficient for HVAC, security and communications but not the latest, greatest equipment available.
These are considered “good value” buildings when weighing price versus quality. They may or may not have on-site property management and a full range of on-site amenities. Class B+ buildings can be quite desirable places to work.
CLASS C BUILDINGS
These Office Buildings compete for very budget-conscious Tenants that require functional, less stylish spaces but at below average rental rates. Typically Class C Office Buildings are the oldest buildings in their submarkets and they are often smaller than their Class A and Class B counterparts.
To put things into perspective, Class C asking rates in Denver’s LoDo Submarket now average $25.88/RSF gross/full service per year, which is 21.7% less ($7.19/RSF) than Class B at $33.07/RSF and 34.6% less ($13.71/RSF) than Class A at $39.59/RSF. Note, too, that these rental rates do not reflect any parking expenses, which in Denver’s CBD and LoDo Submarkets range from $175 to $225/month per space, effectively adding another $4.00 to $5.00/RSF per year.
Class C building systems are considerably older and not of the latest, most efficient generation. In addition, such buildings usually don’t have much in the way of on-site amenities and rarely have on-site property management. Furthermore, they lack a full line up of on-site amenities. Class C properties, however, might offer a common conference room and cheap tenant storage spaces.
COMMON AREA FACTOR & WHY IT MATTERS
A Common Area Factor (“CAF’) is the number that Office Landlords use to mark up each Tenant’s usable SF (“USF”) in order to allocate an Office Building’s Common Area proportionately among all Tenants. This includes common areas such as restrooms, common hallways, main lobbies, each floor’s elevator lobby, communications rooms, janitors’ closets and shared areas like common conference rooms, common break rooms and shared fitness facilities.
The average Common Area Factor, also sometimes called an Add-on Factor, Load Factor, Core Factor or just “the Factor,” is approximately 15% for Suburban Office Buildings. It’s likely in the range of 15% to 18% for Office Buildings located in Central Business Districts/Downtown areas.
For example, to determine a Tenant’s rentable SF (“RSF”), the Tenant’s USF is multiplied by 1.15 and the RSF is the size of premises on which a Tenant actually pays rent. So a 5,000 USF space in an office building with 15% Common Area Factor results in 5,750 RSF (5,000 USF X 1.15 CAF = 5,750 RSF).
Common Area Factors vary between buildings and there is some complexity, and occasionally even deception, in how they are calculated and space is technically measured. In the Metro Denver/Boulder Office Market, good luck getting Landlords’ Listing Agents to quote you a Common Area Factor. They pretend not to know them.
A Landlord’s Common Area Factor can be the result of an actual architectural measurement of the common spaces within a building or an arbitrary number selected by a Landlord. The arbitrary number can be driven by “market forces,” such as what competing Landlords are using as Common Area Factors at their buildings or simply whatever a Landlord senses the market will bear on the high side.
Let’s say that a Landlord actually measures its building with a 13.5% Common Area Factor but decides to charge a 16.5% Common Area Factor, thereby increasing all Tenants’ rents by 3.0% over their entire lease terms. This sleight of hand is troubling for Tenants but it does happen sometimes.
An astute Tenant Representative should be able to ferret out such discrepancies for you. But I allow that sometimes a Landlord will not agree to rectify a distasteful square footage situation, even when caught in the act, leaving a Tenant the choice of either walking away or accepting artificially inflated rents over the course of its tenancy.
The problem for the Tenant occurs because it takes time and serious engagement with a Landlord in order to detect a trumped up Common Area Factor. Starting over at the Tenant’s second choice building can create crisis and angst, depending on how much time is left to lock up a new lease.
The differences between Class A and Class B Office Buildings can cause arguments, with Landlords and Landlords’ Agents often rewarding themselves with higher grades (and rental rates). Subjectivity does come into play.
Although such arguments are less common and not as contentious, the same can be true between Class B and Class C Buildings. Nonetheless, there is more consensus as to which buildings are Class C.
From time to time, Commercial Brokers also feel compelled to mention sub-grades, such as A+, B-, C+, etc. Again, subjectivity comes into play and, to some extent, the beauty (or the beast) is in the eyes of the beholder. As we often hear said, “One person’s trash is another person’s treasure.”
With respect to Common Area Factors, may the Buyer (Tenant) beware.
An experienced, smart Tenant Representative is a big help for Tenants when it comes to sorting out the trash from the treasure, as well as avoiding the Common Area Factor tricks pulled by Landlords and their Listing Agents.
Contact MacLaurin Wiliams and William Gary, MBA, MIM, at cell +1 303-901-1108 or wgary@MacLW.com to confidentially discuss your leasing needs and any questions you might have about classifying Office Buildings or calculating Common Area Factors.