Investing in Office Buildings

When investing in office buildings, there are two different ways that people typically refer to the office space. Which is by the way it was constructed, and its class.

Although a building’s class is far more important, you’ll hear more conversation about how office buildings are constructed, specifically whether they are constructed as:

• High-rise
• Mid-rise
• Low-rise
• Garden office

These categories are based on structure. Your location determines how a building is categorized. For instance, if you are in Orlando, Florida, a high-rise structure may be 30 stories, but if you’re in New York City, it would be 80 to 100 stories. Similarly, a mid-rise in Orlando would possibly be three or four stories, while a low-rise would be one or two stories.

In New York City, the two buildings that came down on 9/11 in the World Trade Center were part of a complex of seven buildings. The day after 9/11, the building that was nearest to Number Two Tower had been partially burned and sustained a lot of heat damage. The authorities feared that it might collapse. The media kept referring to it as the mid-rise building next door to Tower Number 2, although it was 50 stories. However, if you were in Bozeman, Montana, you wouldn’t call it that, since they call a two-story building a high-rise.

When investing in office buildings, class is the more important distinction:

• Class A
• Class B
• Class C

In this article, let’s discuss Class A office buildings. Class A buildings are typically high-rises that were built in this building cycle. That means, from the last time cranes started operating in the area. In other words, the period of a few years ago when you can remember that there was no construction occurring. For possibly as many as four years, no significant building was happening. Then all of a sudden, cranes started working in the area again and you started seeing companies building all over the town again. That might last up to seven or eight years, before another period of inactivity occurred.

Depending on your location, you may be in that period of inactivity since the last building cycle, so you are still in the current building cycle. When these cranes go up, you are in the next building cycle. So, as of writing this article, in this current building cycle in Orlando, that means a Class A building must be just a few years old- less than seven years old, because that was the beginning of the last building cycle. The building cycle before that was about nine years ago, so your class B buildings were built in the previous building cycle.

Class A buildings must have all the amenities, most of the bells and whistles of the best building in town. If the best building in town has live security in the lobby, then your building can’t be Class A, if it doesn’t have live security in the lobby. Maybe it’s not considered the best building in town, but if it is new and has the same amenities as the best building in town, then it can be considered an “A” building. Some new two- and three-story buildings are not Class A buildings, even though they’re referred to as such. Everyone who constructs a new building calls it a Class A building but that’s not always technically accurate. Class A doesn’t just mean that it’s new, it also means that it meets or exceeds the standard of other similar new buildings in that area.

Understanding the different classes is key, when investing in office buildings. Stay tuned for more information on this topic in an upcoming article.