It is time to redefine the Class A office

Many assets considered top-tier in the sector are older and do not meet ESG expectations. That needs to change, says Craig McDonald, principal at Ardstone Capital UK.

In a global office market awash with analysis, accreditations, indices and benchmarks, why do we as an industry still adhere to an historic “catch-all” category of the Class A office? It is a term as much in use today as it was when I began my career in the City of London as a leasing agent more than two decades ago. And yet dramatic changes in tenant and investor expectations, technology and design have created an office landscape that would have been unthinkable at that time.

For many years the Class A office was an asset that was built within the last 10 years and offered high quality design with a specification that provided for air-conditioning, raised floors and suspended ceilings. Now what defines a Class A office building is the subject of some debate given the increasing focus on ESG and net zero carbon. The challenge is that there is always some subjectivity in the categorization of real estate assets despite the plethora of benchmarks and data. However, given the increasing levels of analysis, monitoring and ESG performance criteria should we not be reducing the degree of subjectivity?

McDonald: we should be lowering the degree of subjectivity around categorizing Class A office

Within the Ardstone Regional Office Fund, a joint venture fund with CBRE IM, we are currently delivering an extended and completely refurbished Class A office building in Edinburgh, 24 St Andrews Square. Once completed in early 2025, it not only will offer all of the aforementioned technical items such as raised floors and suspended ceilings, but importantly will be all electric. Having no reliance on fossil fuel must today be a key criteria for the appraisal of a Class A office. But does that mean that an asset with a residual dependency on fossil fuel is Class B? I would suggest that it probably is.

Part of the challenge is that there is very little recalibration of assets. They decline at a gentle pace from Class A to Class A- to Class B+ then finally Class B before being stranded waiting for repositioning, repurposing or redevelopment. Some research indicates as much as 80 percent of the UK office stock might be classed as B or poorer. Asset owners, ourselves included, are often reluctant to acknowledge that an asset bought as Class A, due to time or a changing market, might now be Class B.

One other element that might blur the edges of the Class A category is if you are approaching the asset from a position in the capital or leasing markets. If you are coming from the former, a high quality of income will add to the Class A argument for an asset. I suspect the capital markets have a slightly different perspective to those that are more focused on the occupational criteria.

We now have a range of well-regarded building accreditations from organizations such as BREEAM, WiredScore, WELL and the increasingly influential NABERS. They indicate with ever improving accuracy the performance of an office asset. In defining levels of categorization for an office asset, these accreditations also provide an instant method of comparison.

However, accreditations do not explicitly define what qualifies as a Class A office asset. Charles Dady and his colleagues at Cushman and Wakefield in the UK have drawn up this definition, which is still a work in progress and an attempt to begin the conversation. It also reflects a hierarchy developing, with broad characteristics for each tier:

  • Grade A: A space compliant with industry best practices – such as the British Council for Offices – and energy efficiency regulations, such as the UK’s Domestic Minimum Energy Efficiency Standard. 
  • Prime: Newly built or extensively refurbished space with strong environmental credentials and occupier amenities.
  • Super-prime (or “best in class”): A prime property with features such as terracing, views and a central location.

Some of that criterion still seems very subjective and for me the definition is still too broad. Class A specification still needs to be clearly defined, but as a start, we should include zero dependency on fossil fuel, proximity to transport, wellness amenities, access to open space and net zero carbon in operation.

When valuations remain a topic of intense debate, it will be challenging for asset managers and real estate owners to accept that Class A classification has to be much tighter. But if we do not address it now, then when?