Commercial brokers forget their manners when discussing the three-letter classification system for New York office buildings. The three-tiered system that makes a space A, B or C is “a bad system altogether,” and “is screwed up,” say two market vets. Another is more succinct and crude: “it sucks.”
Like grading student writing, where there is no “right answer,” the subjectivity of criteria for the definitions of Class A, B and C buildings is puzzling and frustrating. Marc Miller, president and founder of commercial firm Miller & Partners, once believed the rating system correlated to size only, while Georgia Malone, president of Georgia Malone & Co., uses the classification system to reflect upon only the age and condition of a building.
CoStar Group, the real estate information company, defines a Class A building nationally in its online glossary: “In general, a Class A building is an extremely desirable investment-grade property with the highest quality construction and workmanship.” Similarly, the definitions for Class B and C buildings also begin with the phrase, “In general,” followed by a subjective description. (CoStar also defines a fourth class, Class F, which applies to nearly condemned buildings.)
When asked who assigns a building’s class and which specific standards CoStar uses to compare the classes, Maureen Wheeler, director of CoStar’s communications, said, “We base our decision on the definitions and take into consideration the market and regional differences.”
“I don’t think people put much faith in that classification system to begin with,” said Michael Rudder, director of office leasing and sales at Time Equities. “I think we should get rid of it altogether, and let tenants and owners decide for themselves how one building stands up against another rather than get an outdated and obsolete classification system to drive their opinion.”
All the brokers who spoke to The Real Deal wanted to dispose of the current classification system, dismissing it as subjective and useless. “It’s the lazy person’s way out of doing their homework,” said David Levy of Adams & Co.
Malone also noted that a building’s grade does not reflect profitability. A Class C building may prove an excellent investment opportunity, whereas a Class A may provide a smaller return rate over a longer investment period.
Many brokers said they would benefit from a more quantitative system similar to the 10-point Apgar system in obstetrics. Before Dr. Virginia Apgar introduced the point system for judging a newborn baby’s health, obstetricians had no quantitative method for diagnosing a child. Children with imperfect births — poor coloration and low respiratory rate, for example — were often considered stillborn. In 1953, Apgar published a counting system for measuring a baby’s health — two points if the baby has healthy coloration, two points if the baby is crying, etc. — and this system revolutionized obstetrics and child delivery.
Commercial brokers say they need a Virginia Apgar to reform the ranking of buildings. It would not be difficult. Buildings have quantifiable features that could receive numerical scores: size, age, amenities, rent, security, utilities, vacancy, etc. The total score, probably out of more than 10, wouldécorrelate viscerally to a building’s overall quality. Has the building been renovated within the past 10 years? Two points. Do communal spaces such as a gym or conference rooms equal X percent of the total square feet? Two points. Do rents exceed X dollars per square foot? Two points.
With a point system and checklist for commercial buildings, anyone could rank a building and come up with the same score as someone else. Of course, this could raise the issue of developing or renovating buildings just for points, similar to how some teachers in the school system often teach classes not based on the curriculum but based on academic aptitude tests.
Mark Miller remembers when he entered real estate in 1982, principals at commercial real estate firms spent time teaching about building quality, both subjective and objective. They focused on the quantifiable versus the qualitative, he said.
“It is absolutely true that the industry has gotten lazy in terms of classifying buildings properly with some sort of intelligence behind it,” he said. “It really makes no sense, because what a building owner would think is their Class A, is really a tenant’s Class B- or C+.”
Whether the commercial industry replaces the current grade curve with a more precise, quantifiable system or whether the industry scraps classification altogether, one thing is clear: The current system isn’t making the grade.