Class A multifamily properties are some of the most desirable and expensive places to live. They’re the luxury high-rises you see popping up in big cities with incredible views and floor-to-ceiling windows.
But does luxury translate to a solid investment? What exactly classifies a Class A multifamily property?
This guide breaks down the characteristics of Class A multifamily properties (as well as class B and class C properties), and includes the perspective of multiple industry professionals on whether they are a good CRE investment.
What Does Class A Multifamily Mean?
“Investment-grade multifamily apartments are often rated on a semi-formal A/B/C scale,” Chris Beres, VP of Investor Relations at Milhaus, told Leverage.com. “Class A constitutes the best quality apartments; the newest properties in top locations with extensive amenities, high-end finishes and usually above-average rents.”
Multifamily real estate — which in CRE is a property with five or more residential units — is typically thought of as one of the most solid asset classes CRE investors can choose because people will always need a place to live. So a Class A multifamily property combines top-of-the-line quality with a reliable CRE asset class.
Characteristics of Class A Properties
Classification of Class A, B and C properties is based on an informal set of characteristics real estate investors and lenders use to assess a property. Here’s what you can typically expect from a Class A property:
- Up-to-date renovation (in the last 10 years)
- Central location in a highly desirable city located near transportation
- Fully renovated and upgraded with high-end finishes (e.g., granite countertop, stainless steel appliance)
- Amenities in the building, like a gym, pool and/or coworking space
- Doorman and concierge service
- Laundry units in units or laundry service available to tenants
- Tend to attract a city’s highest earners, are in demand and typically see low vacancy
As you learn how to evaluate and analyze multifamily properties, you’ll begin to be able to identify property classifications on sight.
What Are Class B and Class C Property Classifications?
While Class A properties are top of the line, here are some of the criteria for Class B and C properties:
Class B Multifamily Properties
- Property built within the last 20 years
- Amenities package, both inside the residential unit and for the building are less than what the top end of the market is currently offering
- Rents for the units fall under class B rates
- The building is in good condition with little need for continual repairs
Class C Multifamily Properties
- Property built within the last 30 years
- Has not been renovated
- Not located in a central location
- The building offers residents limited or no amenities
- Appliances have not been renewed
Is a Class A Multifamily Property a Good Investment?
While the general consensus is that Class A multifamily properties are a safe investment, industry professionals vary on whether they are the best investment route to take. However, one fact is clear: Class A properties are also the most expensive properties. Only the most well-funded developer will be able to consider these properties.
Nonetheless, Beres pointed to a few reasons Class A multifamily real estate properties may be particularly strong investments right now.
“Class A is ubiquitous and in high demand as housing — and particularly middle-income housing — is undersupplied across the nation. It will likely continue to benefit from demographic and migratory supertrends supporting supply/demand imbalances, such as very strong net in-migration/population growth in certain regions/cities and submarkets,” he said.
“As buying houses become more unaffordable, younger professionals are renting for longer. Concurrently, empty nesters and others are increasingly becoming renters by choice, supporting a more itinerant lifestyle.”
Brian Boyd, Owner and Managing Attorney at Boyd & Wills, PLLC added that another reason Class A multifamily are considered safe investments is because the tenants who occupy these buildings tend to be financially solid.
“To get into a Class A property, there’s typically a required minimum credit score, which will give you a fairly good idea about your renter,” he said. “Those renters typically have renter’s insurance, coming up with a security deposit is not typically a problem and they tend to be stable from a work standpoint — even though they may not be able to buy a house, they have regular income.”
Jonathan McKay, Real Estate Investor and Developer at The McKay Organization, advises his partners to consider other investment options. “I always tell friends or fellow partners looking to invest, to buy multifamily investments they can afford. In that case, many class A multifamily investments are good for investors with a lot of money to spend. It’s not a bad investment by any means, but it’s not the choice that I make,” McKay said.
He added that higher rent does not necessarily equal reliable income. “Often those properties are in big cities and with rental prices being as high as they are, they may be hard to lease creating a risky ROI. Many people are moving to more rural areas for affordability. I invest in multifamily because it is recession-proof with consistent cash flow,” he said.
McKay favors multifamily properties that require extensive renovations in locations around urban areas. “I invest the money and time by either flipping the property or leasing it to see a return on my investment. Class A is not what I spend my time and money on nor is it my professional advice to make that investment, but some do and see success.”
How to Invest in Class A Multifamily Commercial Real Estate
Class A multifamily properties have many different investors, from the largest institutional investors in the world to individuals, Beres said.
“The primary method of Class A multifamily investment is acquisition, where investors typically target the purchase of property from a developer or subsequent owner. Conversely, development targets an investment at the onset of project’s construction in order to realize additional value creation via expertise in strategy, design, construction, operations and execution,” he explained.
There are also passive investment methods that “allow investors to be part owners of the apartment buildings without participating in the day-to-day operations,” Boyd said.
One option is investing in a real estate investment trust (REIT) that contains Class A multifamily properties. Another is to participate in crowdfunding, a method for multiple investors to pool their money online.
If you need or prefer financing (as opposed to a cash buy) to invest in, develop or acquire a Class A multifamily property, connect with a debt brokerage such as Lev, Leverage.com’s sponsor.
Of course, all these methods come with their own risks and require research.
Real-World Examples of a Class A Multifamily Property
Here are some real-world examples of what Class A multifamilies look like and the kinds of amenities they provide:
171 Chrystie Street, Manhattan, New York
Located in Nolita, the heart of downtown Manhattan and one of the most desirable locations in NYC, 171 Chrystie Street is one example of a class A multifamily property. The building is a 16-story new development in top condition, floor-to-ceiling windows, the latest finishes and top-end appliances. The building also offers residents the latest amenities like a fitness center, gym with a sauna and Peloton bikes, a pet spa, sun loungers, a misting shower and an outdoor cinema.
Five Park, Miami Beach, Florida
Five Park, a brand new development in Miami, is one anticipated new building in the area. When complete, the building will feature 98 luxury units with unparalleled views. The amenities span 50,000 square feet and include a pool deck and a 3,500 square-foot terrace, relaxation lounges, a park, a gym with fitness services (including personal trainers and coaches), a screening room, housekeeping services, a kids’ learning lab and a mobile app to facilitate access to these amenities.
The Harper, Franklin, Tennessee
The Harper is a luxury building in Franklin, Tennessee located a 20-minute train ride from Nashville. The units come with a patio or balcony and 10-foot ceilings. The building offers residents attractive amenities such as an on-site yoga studio, curated walking paths, a pool and a dog park.
Is Multifamily Considered Residential or Commercial Real Estate?
Multifamily is considered commercial real estate. If an apartment has more than five units, it is considered multifamily. On the other hand, a single-family home (SFR) or duplex is classified as residential. A portfolio of SRFs, however, can be considered a commercial real estate investment.
A Solid Investment for Investors With Lots of Money to Spend
While Class A multifamily properties are a solid investment, they are only an option for investors with access to enough capital to invest in a more expensive asset classification. While some professionals believe they are becoming more desirable as housing becomes undersupplied across the U.S., others believe they are becoming less desirable as people flee big cities in search of more affordable places to live. Still, multifamily properties, regardless of the property classification, are considered a reliable and recession-proof investment, with Class A being the top-quality properties.