Office brokers, building managers and tenants have long followed the ABCs of commercial real estate, a subjective but helpful ranking to separate premier office towers from plain ones.
But the class system is breaking down as buildings that used to be lower ranked are being updated to the point where distinctions are getting blurred.
The changes have led at least one Twin Cities real estate services firm to create its own ranking system and have attracted clients to some renovated middle-of-the-road buildings.
“We don’t see tenants that say, ‘I want to be in a Class A building or I want to be in a Class B building,’ ” said Brent Erickson, an executive director in office leasing for the local offices of Cushman & Wakefield. “They would either say ‘I want to be along Nicollet Mall’ or ‘I want to be in the North Loop’ … and now what we are starting to see more often is tenants saying, ‘I want to be in a building that has these features.’ ”
Features that used to be reserved for landmark skyscrapers, like well-outfitted fitness centers and outdoor terraces, are now becoming common in remodeled buildings.
One of the most notable renovations of what many considered Class B space in the heart of downtown Minneapolis is the Baker Center, which had its grand reveal of its renovations this past summer. The complex now features a two-story lobby, new amenity floor and high-grade finishes.
Law firm Faegre Baker Daniels leased 85,000 square feet in the Baker Center to move its operations team from Wells Fargo Center, the biggest leasing deal downtown in the third quarter, according to a quarterly office market report by real estate company CBRE. Wells Fargo Center will still be the law firm’s primary location.
Upgrading to be competitive
Even Class A buildings are upgrading. The Fifth Street Towers, a Class A building in downtown Minneapolis, recently completed a massive renovation, adding a luxurious amenity floor and skyway bar.
Fifty South Sixth, a 29-story tower, redid its ninth floor to add a lounge, conference center and a fitness center complete with virtual instructors. “It definitely has generated more interest,” said Pam Haque, the building’s general manager.
“With so many buildings offering so many different types of amenities, I think it kind of blurs it a little bit of what is the true difference between Class A, B and C,” said Kevin Lewis, executive director of the Building Owners and Managers Association (BOMA) Greater Minneapolis.
It’s a trend that is not just being seen locally but nationally, said Lisa Prats, a spokeswoman for BOMA International.
“As the nation’s building stock grows older, building owners need to make a decision whether they are going to renovate these properties or repurpose them,” she said.
Average buildings that could be considered Class B could move up to B+ or A- rankings with the addition of new amenities and finishes, she said.
Some of the local renovated buildings will likely be able to eventually charge higher rents, but upgrades are mainly done to stay competitive and increase occupancy, said Steve Shepherd, vice president of office brokerage at Colliers International’s local office.
Renovations, not more rent
“It is an arms race,” Shepherd said. “Even just to get the tours and to make the shortlist you really have to check the boxes. … Sometimes it’s not even going to allow you necessarily to push the rates dramatically.”
The building classification system has been around for decades, but it is difficult to pinpoint its origin, Prats said. BOMA International publishes on its website the broad definitions of the classes, which are used as a benchmark for other companies.
“The classifications are not a standard but a guideline, and part of that is because it’s so subjective,” Prats said.
The building class definitions are used by real estate services firms as they monitor the office market and set rates. Market reports that detail vacancy and rental asking rates are often divided by location and building class.
Some firms go beyond basic definitions in describing building class. For example, the local office of Cushman & Wakefield categorizes Class A buildings as generally 200,000 square feet or larger and constructed since 1980. Those that are downtown have to be skyway-connected.
CoStar Group, which offers a database for more than 5 million properties, came up with its own star-based building rating system in 2014.
Locally, another firm has created its own five-star system to complement the building class definitions. The new Twin Cities office of Newmark Knight Frank has started to rank office buildings by a system it calls “the Tenant Experience.”
Based on 17 categories, buildings are ranked from one star, which represents a limited building, to five, which denotes an exceptional one. The categories represent the new perspective of what tenants want from their offices, including sustainability, natural light, proximity to mass transit, exterior gathering places and modern mechanicals, the firm said.
“With our low unemployment, it’s challenging to retain and attract top talent. If we say ‘You should move into a Class A building,’ that doesn’t mean anything to their employees,” said Jim Damiani, an executive managing director of Newmark Knight Frank’s Twin Cities office. “What’s the experience like? What does the building have?”
So far, the firm has ranked properties in downtown Minneapolis and the western and southwest suburbs with plans to expand. The plan is to grow the system nationally, said Maura Carland, research director of Newmark Knight Frank’s Twin Cities office, who compiled the data.
“This adds another element to searching so we can get down to the right buildings faster,” she said. “We are excited to grow this system for our clients.”
Nicole Norfleet • 612-673-4495
Breaking down the classes
Most prestigious buildings competing for premier office users with rents above average for the area. Buildings have high-quality standard finishes, state-of- the-art systems, exceptional accessibility and a definite market presence.
Buildings competing for a wide range of users with rents in the average range for the area. Building finishes are fair to good for the area and systems are adequate, but the building does not compete with Class A at the same price.
Buildings competing for tenants requiring functional space at rents below the average for the area.
Source: BOMA International