Every parent believes their baby is the most beautiful in the world. Of course, as the characters in Seinfeld showed us, parental belief and physical reality may be two completely different things. The fact is that when it comes to assessing our own babies, it is difficult to be objective. Not surprisingly, landlords are much the same way when characterizing their buildings. Their inability or unwillingness to see the flaws in their buildings is due in part to sentimental attachment and in part to economic self preservation and salesmanship. Ask the average landlord in Center City or the surrounding suburbs if their building is Class A, Class B or Class C and the majority will insist theirs is Class A. It is not surprising, therefore, that many tenants are confused by the classification and they want to know, “What exactly is a Class A building?”
Unfortunately, there are no black and white, objective standards for determining what is a Class A building. Classifying assets is often a relative analysis. Thus, a Class A building in one submarket might be viewed as a Class B+ asset in another, newer market. While beauty is ultimately in the eye of the beholder, most people in the industry agree that the determination is based on certain essential characteristics including: age of the building, location of the building, building amenities and tenant mix.
Age of the Building. This one is usually pretty straight forward. The newer the building, the better the class of asset. Newer buildings typically provide state of the art HVAC systems, fast elevators, LEED certification, and fancy lobbies with big screen televisions. They are also shinier and have less wear and tear. As we have described in many other blogs over the past few years, our stock of office inventory in the region is aging because flat office rents over the past 20 years have not justified the development of new, speculative office product. Thus, the average age of office inventory in Center City is well over 50 years. Unless landlords start to accelerate the rate of investment in renovations and upgrades (i.e., Commerce Square, 550 East Swedesford Road, etc…), more and more regional assets appear to be declining under this criteria and will fall out of the “Class A” mix.
Location of the Building. Why is it that certain suburban office markets like Radnor, Bala Cynwyd and Conshohocken have been able to sustain or even grow rents over the past five years while other markets like Horsham and Fort Washington have suffered? As the age old real estate adage goes: “location, location, location.” The fact is companies want to be located in areas which are convenient to their current employees (and potential employees) and which have good amenity bases in the immediate area. More and more, companies are stressing the necessity of access to public transportation as the new Millennial Generation shuns cars in favor of trains and buses to reduce their carbon footprint and seeks to minimize their monthly expenses. Thus, certain locations are considered Class A or primary locations while others get discounted due to a less desirable area.
Public transportation access is also becoming more and more important as companies continue to drive up their densities and become more efficient in their use of space. While 10 years ago a corporate headquarters may have consumed 350-400sf/person, today it is likely that those ratios are 250-300sf/person or even less. In call center operations or other cube intensive operations, the ratio can be 150sf/person. Because most older suburban office building developments were built to accommodate the older, more generous space allocations, they can accommodate only 3 to 4 cars per thousand square feet of space, not the 5-7 cars per thousand that many business operations need today. That means in order for the location to work for a company, its employees must be able to get to work using public transportation.
Building Amenities. Buildings with more amenities tend to be more highly valued. Thus, when renovating 550 East Swedesford Road (Crosspoint), the landlord included a high end, professionally run cafe, a state of the art fitness center and a conference center. As we tend to be social animals by nature, these common amenities are highly valued by most companies because they provide places for their employees to interact with each other as well as with other workers in the building, creating a more dynamic environment and work experience.
These in-building amenities are especially important in suburban office buildings where people normally need to get in their cars to eat, work out or even buy sundries. In the core Center City business district where there are scores of eateries, drug stores and shops within a five block radius of most buildings, these in-building amenities tend to be a little less important. For example, along West Market Street in Center City, if your building doesn’t have an ATM machine, chances are the building next door has two. Commerce Square recently spent millions of dollars creating a “sense of place” for its tenants. It includes an upgraded central courtyard with big screen TV, new fitness center and restaurants. It is no longer just a place to work but also now a place for employees to hang out during lunch or after work.
Tenant Mix. Another important factor in assessing the class of an asset is the type of tenants who currently occupy the building. In some cases, the status of a building can be raised or lowered simply by the names on the building directory. Who wouldn’t want to be in a building with Apple, Google, FMC or Comcast? These tenants add cache to the asset and make it a place where other top firms want to locate. On the flip side, most high quality buildings tend to discourage (and some lease forms actually prohibit) uses that generate a lot of incoming traffic like customer service centers, government offices, schools or classrooms or uses that put high demand on parking or building services like call centers.
Just as people tend to befriend people who are like them, tenants also tend to want to be around businesses that are similar to them. One Logan is primarily occupied by law firms and Mellon Bank Center has become a magnet for financial services and investment banking firms. This phenomenon is becoming more and more prevalent in the tech and innovation areas. These types of companies are looking for synergies with other tenants nearby. Younger companies are hoping that proximity to the right intellectual capital in the building will lead to business synergies and even an accelerated growth curve.
In sum, there is no black and white definition of a Class A building. Like the Supreme Court’s definition of pornography, in most cases “you just know it when you see it.” Clearly the shiny new buildings like FMC Tower at Cira Centre South and the Comcast Innovation and Technology Center will be trophy/Class A buildings as are some of the newly renovated buildings dotting our landscape. However, the fact that a landlord characterizes its older, tired building as a “Class A” building doesn’t mean it’s deserving of the same high rents of newer, better located buildings in the area. Saying a building is Class A doesn’t mean it is. Needless to say, if Jerry, George and Elaine were to tour all of the landlord proclaimed “Class A” buildings in our region, there is no doubt they would find more than a few ugly babies.
For more information contact Glenn Blumenfeld