Are there any studies on the factors that determine the difference between the rents on Class A, B, and C properties?
It makes sense to me that Class A properties command higher rents than Class B properties, and Class B properties higher rents than Class C properties. It seems to be often the case, however, that the rent one class commands rises or falls faster than the rent another class commands, thus widening or narrowing significantly the rent differential. I was wondering whether there exist any papers explaining this dynamic.
[{"id": "dc6ov6n", "text": "I'd look for new supply and absorption by class for whatever market your interested in. Absorption will reflect the demand for a specific property class. It's also worth it to look for the terms \"in place\" or \"effective\" rents, as asking rents are typically inflated", "replies": [], "depth": 1}, {"id": "dc6phr3", "text": "NAIOP:\n\nhttp://www.naiop.org/~/media/Research/Terms%20and%20Definitions/Terms%20and%20Definitions_080612.ashx", "replies": [], "depth": 1}, {"id": "dc7wndk", "text": "For one thing, the passthroughs tend to be significantly higher on Class A buildings. Those costs are relatively inelastic, and therefore a larger percentage of the total rent is locked compared to a class B or C building which can be more flexible with it's rental rates and can go lower if the economic conditions become worse. Also, Class A buildings may be owned by more institutional owners leading to more rigid leasing standards, and perhaps deeper pockets to wait out a market downturn (at the cost of higher vacancy) rather than reduce rental rates by a significant amount. This is particularly true when the owner is a long-term holder, such as a life insurance fund, as opposed to an investor with a shorter value-add investment window of say 5 years.", "replies": [{"id": "dc86uno", "text": "That makes a lot of sense. Can you explain why it is that the passthroughs are so much higher for class A buildings, and why they tend to be inelastic? Would one not expect them to fall in a downturn?\n\nThanks you.", "replies": [{"id": "dc87sub", "text": "Class A buildings are simply more valuable, usually located in a better location, taller with higher floors, better finishes, on-site gyms, conference facilities, tenant lounges, 24-hour door men, etc. That means two things: 1) A higher tax psf because it's a better building in a better location, and 2) all those tenant amenities are expensive to maintain, meaning a higher passthrough number psf for common area maintenance as well.\n\nBuildings can certainly appeal their taxes in the event of an economic downturn or high vacancy, but even if they are reduced, they are still likely higher than a class B or C building is paying. Similarly, they could try to cut the CAM expenses, but usually buildings are trying to spend money very efficiently on that already to keep costs in-line, and you can't just cut out amenities that your existing tenants were promised when they signed a lease at the building, so those costs are fairly fixed.", "replies": [{"id": "dc8dyne", "text": "Thank you very much. ", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}]