Should You Invest in a Class C Industrial Building?

By Published On: November 4, 20224.1 min read

When it comes to industrial real estate, buyers and investors have a few different options. Class A, B, and C industrial buildings all offer different pros and cons. Although Class C buildings are cheaper and often in worse shape than Classes A and B, they come with a number of benefits to investors.

What Is a Class C Industrial Building?

Class C industrial buildings are usually 15 years or older, with a high number of maintenance issues, often located in less desirable locations, said Alex Capozzolo, Co-founder at Brotherly Love Real Estate.

Reid Hogan, a Commercial Real Estate Advisor at PropertyCashin, noted that Class C industrial buildings are often farther out of town or otherwise not easily accessible to freight vehicles. Hogan also said that the buildings could be so outdated to the point that they don’t have any desirable features such as loading docks or overhead cranes.

These buildings have the lowest rental rates in the market, Capozzolo added, making them difficult to use as passive income. Tenants, Hogan explained, are sometimes businesses that want the largest square footage for the least amount of rent.

“They don’t want long-term leases and will balk at triple-net terms,” Hogan said.

Benefits of Investing in Class C Industrial Buildings

Although Class C industrial buildings are sometimes considered the worst of the three classes of industrial buildings, they can be beneficial to certain buyers, depending on their needs.

For starters, Class C industrial buildings have low initial costs, Hogan said, and in most markets, there are more opportunities to buy Class C properties. Class C properties can also offer the most potential for a value-add investment, Hogan added. Improved properties can attract stronger tenants, increasing the value of the property and its classification.

“If the buyer can improve them to a higher classification, they can either flip it in a sale or lease it themselves,” Hogan said.

Capozzolo also pointed out that Class C buildings are good for high risk-taking investors, as the buildings may offer a high return on investment in the future.

Drawbacks of Class C Industrial Buildings

On the other hand, Class C industrial buildings come with a high number of drawbacks.

Class C industrial buildings have weaker lease guarantees, Hogan noted. As a result, landlords have to budget for higher vacancy rates. Repair and maintenance expenses will also be much higher than other classes of industrial buildings, Hogan added. Property owners may not be able to maintain a stable income stream with a Class C industrial building.

Building location will also leave something to be desired. Class C industrial buildings are often in areas away from cities or towns, where many tenants don’t want to be.

“Class C industrial buildings come with a lot of risk for the investors, and they must be well aware of the parameters regarding the return on investment,” Capozzolo said.

Example of a Class C Industrial Building

An example of a Class C industrial building would be an older factory situated far away from the city, Capozzolo said. These factories are generally off-route from the main highway.

This industrial warehouse built in 1952 is the perfect example of a Class C industrial building. The warehouse is older and in need of renovations. It is located in Glendale, Arizona, a suburb of Phoenix.

Considerations Before Buying a Class C Industrial

Before buying a Class C industrial building, there are a number of factors to consider:

Existing Conditions

One of the main factors to consider when it comes to Class C is the building’s existing condition, Capozzolo explained. Class C industrial buildings often require a good deal of repair and maintenance. Before purchasing the building, make sure you understand how much money you’ll need to put into improving its condition in order to retain or land a tenant.

Location

Just like with Class A and B industrial buildings, location is an important factor to consider with Class C. Because Class C buildings are typically farther out from cities than Class A or B, it can be more difficult to attract and keep tenants.

Value-Add Potential

Class C industrial buildings are often a work in progress. However, this means there’s potential to add value to your property. Before purchasing or investing in a Class C industrial building, it’s a good idea to consider whether or not you can add value to the property through leasing, management, or capital spend.

Class C Industrial Buildings Can Be Risky But Rewarding

Depending on your goals as a buyer or investor, Class C industrial buildings can be a good option. Although they come with a great deal of risk, since the building is likely to have a lower-quality tenant, be older and have a less desirable location, they also have potential. It’s possible to turn a Class C building into a higher-class building, or even just improve the building enough to create a good return on your investment.

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