Status is far from fleeting for the average triple-A or class-A office building. With no consistent criteria for determining ratings and no recertification process, a designation once achieved is generally retained regardless of emerging competition.
“There is a reluctance to demote the stature of a building,” acknowledges Ian MacCulloch, national research director with Colliers Canada. “The reality is, (buildings) get left alone unless something dramatic happens.”
This arguably provides a more accurate picture of a building’s entry point into the market than its continuing position but, particularly for prospective tenants, it captures a range of considerations beyond the more rigid performance-driven benchmarks of certification programs like the Canada Green Building Council’s LEED (Leadership in Energy and Environmental Design) or BOMA BESt (Building Owners and Managers Association’s Building Environmental Standards).
“It’s just an ingrained way of talking about the market,” says MacCulloch. “It’s a way of categorizing and comparing what’s mostly financial: A triple-A (building) commands ‘x’ and a B building is ‘y’. I look at it as price point stratification.”
Classes have traditionally defined office buildings within a given market based on a subjective assessment of building amenities and operational systems, the quality of tenants and the prestige and/or convenience of location. Brokerages or third party analysts assign the class – often in consultation with the building owners, who may also be their clients – using largely consensual evaluation standards that are nevertheless open to interpretation.
BOMA International sets out three standard definitions for A, B and C class buildings within a single metropolitan office space market and three broader categories – investment, institutional and speculative – for investors across multiple markets; however, it maintains the rating systems are simply to “encourage standardization of discussion” and provide a framework for reporting conditions and differentiating stock. “BOMA International does not recommend the publishing of a classification rating for individual properties,” the association states.
“It’s always been more art than science and the bands have always been pretty wide,” says Sandy McNair, president of market research and statistical reporting firm, Altus InSite. “In most markets, it’s A, B, C and G for government buildings. Some cities like Toronto, Calgary and Vancouver add an double-A or a triple-A but there is almost never agreement on what’s double-A or triple-A.”
Disagreement about class characteristics doesn’t necessarily translate into discontent, however. McNair says that only about a dozen landlords ever question the outcome of the approximately 5,000 building evaluations the company conducts in a typical year.
“Each company can have its own approach to designation but it is usually pretty accurate and there are not a lot of differences,” says Bill James, managing principal with Cresa Vancouver, a leasing specialist on behalf of tenants. “It’s essentially self-regulating because companies need to ensure the accuracy of their research reports. There is a lot of competition in that market.”
Nor does the inclusion of social and subjective considerations make for a less discerning evaluation process. Rather, they give credence to intangibles that can influence occupants’ experience of a building as much as the technical measures that LEED or BOMA BESt award.
“If you’ve got a really good building that for some reason fills up with dubious tenants, then, theoretically, it wouldn’t be a class-A building anymore,” says Altus’ McNair. “A 15,000-square-foot building, no matter how good it is, is not going to be class-A.”
More context required
On the flipside, green buildings are skewing the assumptions that historically tied higher status to higher occupancy costs, while class designations lag new formulas for calculating value.
“With the cycle today, the work on large properties is kicked off by large tenants, and large tenants tend to be very sophisticated real estate occupiers,” says Colliers’ MacCulloch. “The new buildings are more efficient and, on an occupancy cost basis, their price point is lower by virtue of that efficiency.”
Many corporate tenants now have different priorities from the blue chip firms that moved into earlier generations of class-A buildings such as requirements to comply with corporate responsibility and sustainability principles. Investors, likewise, need more data than what Altus’ McNair calls the “overworked attribute” of class.
Energy performance labelling or reporting, which regulators increasingly hint could be mandatory in the future, seems a likely addition to the list. A significant increase in density from the days when the corporate standard was an average of 260 square feet per employee also boosts the profile of a perhaps seldom considered structural element: The width of the stairwell.
“That will determine whether the fire marshal is going to allow you to put more people in a building,” explains McNair. “It can and will be a constraint if the real estate industry tries to go down to 120 feet per person.”
Coincidently, a task group of the Canadian commission on building and fire codes recently studied a proposal to increase the current minimum width of stairwells in larger buildings covered in Part 3 of the National Building Code from 1,100 millimetres or 44 inches to 1,420 millimetres or 56 inches. That code change request was prompted more by the general population’s expanding body mass index than building density trends; however, it highlights potential advantages of new construction that wouldn’t be captured in a LEED or BOMA BESt designation and aren’t differentiated between new and older class-A buildings.
“There are some class-A buildings that should be class-B buildings,” asserts McNair. “In Calgary, 30 per cent of the existing stock has been built since the year 2000; 12 per cent of Toronto has been built since 2000. The newer stock should technically be pushing some of the older class-A buildings down a rung.”
Interpretation and expectations
Class provides an initial reference point for tenants seeking space but leasing experts are often called on to provide more interpretation.
“Tenants want to know what the class of the building is and it’s one of the first questions they ask me. It’s important they have some sort of standard to compare with,” says Cresa Vancouver’s James. “The standard doesn’t have a B+ but I feel there is room for a designation between a class-A and a class-B. When I discuss these things with a tenant, I will say whether it’s triple-A, A, B+ or B. C is usually a building that is not in good repair and has been bought for renovation or redevelopment.”
Even as large corporate tenants propel new green construction, the sizable majority of mid-sized and smaller companies tend to look for competitively priced space that meets their needs, whether that’s good management, room to grow or accommodations that will support the all-important battle for talent.
“Some buildings look like an A but perform like a B. Or something might look like a B building but perform like an A,” says James.
“It’s not all about being the best and most expensive. Sometimes the winners can be one or two rungs down from the very best but they’re very good,” concurs Altus’ McNair. “It’s about the extent to which expectations have been met.”
Barbara Carss is editor-in-chief of Canadian Property Management and Building Strategies & Sustainability magazines.
