If you spend any time looking at passive real estate investments, you will eventually come across a building described as Class A, Class B, or Class C. When I first encountered these terms, they seemed relatively straightforward. Class A sounded like the best, Class B somewhere in the middle, and Class C at the lower end.

That is the basic idea, but there is more nuance to it.

The class system is a form of shorthand used to describe the relative quality of a property. A building’s age, location, condition, amenities, and ability to attract tenants can all influence where it falls. In general, Class A refers to newer, higher quality, and more competitive properties. Class B and Class C buildings tend to be older or require more improvements and active management.

Why does this matter to us as passive investors? Because the building is ultimately what sits behind all of the projections in a real estate offering. Its condition can affect future expenses. Its desirability can affect rents and occupancy. And its quality may influence who is willing to buy it when the investment eventually ends.

Yet most physicians have never been taught how to evaluate any of this before committing capital. I certainly was not taught it in medical school or residency. Like so many parts of personal finance, it is something we have to learn on our own.

Realberry is a commercial real estate sponsor that invests heavily in the Class A segment of the market. So, I wanted to look more closely at what the Class A label tells us, why Realberry focuses on it, and what the classification leaves unanswered.

This sponsored post was created in partnership with Realberry.

What the Class A Label Actually Means

Class A generally describes the highest quality, best located, and most competitive buildings within a particular market. These properties are often newer or extensively renovated and may command above average rents.

The phrase “within a particular market” is important. Class A is a relative grade rather than an absolute national standard, and its meaning can vary by sponsor, market, and asset class. A Class A apartment building in a secondary market is a different asset from a Class A office building in a gateway city.

The letter alone also tells us nothing about whether a deal is priced sensibly. Class A describes the quality of a building, but it does not necessarily describe the quality of an investment. It is one part of the evaluation process, not a substitute for evaluating the sponsor, market, purchase price, and business plan.

With that distinction in mind, we can look at where owning a newer, higher quality building may make a difference.

Fewer Near-Term Surprises

Every building has parts that eventually need to be repaired or replaced. Roofs, HVAC equipment, elevators, and life safety systems all have useful lives, and replacing them can be expensive. Newer buildings generally sit earlier in those replacement cycles.

As limited partners, we are not the ones calling the contractor or managing the repair. That responsibility sits with the sponsor and property management team. But we still feel the financial impact.

Capital expenditures are paid for through property cash flow or reserves. Therefore, money spent replacing a chiller or roof is money that cannot be distributed to investors. A large unbudgeted expense can reduce distributions for a period, draw down reserves, or, depending on how the deal is structured, lead to a capital call.

Newer buildings may have smaller capital needs in the near term, but no property class eliminates these expenses. The age of the building matters, but so does how carefully the sponsor has estimated and reserved for future capital expenditures.

Where Performance Has Been Diverging by Quality

Recent market data also helps explain the attention being paid to higher quality properties. Across office, multifamily, and hospitality, the gap between the top tier and the rest of the market has widened. Published figures through mid-2026 show vacancy, rent growth, and pricing power generally moving in favor of newer, higher quality assets.

In office, CBRE reported prime vacancy of 12.3% in the second quarter of 2026, compared with an overall office vacancy rate of 18.3%. In its 2026 U.S. Real Estate Market Outlook, CBRE described the gap between prime and non-prime performance as near a record high, while prime construction activity remained well below average.

JLL reported that newer buildings have become exceptionally rare in most markets. Leasing volume at rents above $100 per square foot reached record levels over the prior 12 months, while effective rents for new construction grew by more than 20% on a rolling 12-month basis.

The same general pattern has appeared in multifamily. CRE Daily reported in August 2026 that stabilized Class A apartments posted 1.9% year-over-year rent growth using RealPage data. Class B rents were roughly flat, while Class C rents declined by 2% annually.

In hospitality, the difference has shown up in pricing power. CoStar reported that through April 2026, luxury average daily rate growth sat just below 6%. Select service properties were closer to 2%, below the rate of inflation, while lower end properties continued to experience rate weakness.

Interestingly, CoStar noted that demand growth itself was spread across the different hotel categories. It was the ability to raise rates that remained concentrated in the upper tier. Speaking on CNBC in August 2026, Goldman Sachs analyst Lizzie Dove described high income tourism as “off the charts,” with travel spending holding up even as broader consumer sentiment wavered.

Of course, this does not mean that every Class A property will outperform or that these trends will continue forever. But the data offers some context for why sponsors like Realberry are paying close attention to property quality.

Who Buys It at the End?

This is another part of passive real estate investing that can be easy to overlook. A limited partner cannot simply sell a private real estate position in the same way that we can sell shares of a publicly traded stock. There is no daily pricing and generally no liquid secondary market. Capital is typically returned when the property itself is sold.

So, the question of who may want to buy that property five or seven years from now is not academic. That future sale is usually the point at which passive investors expect to receive the remaining value of their investment.

Institutional quality assets tend to attract a wider pool of potential buyers. That can include real estate investment trusts, pension funds, insurance companies, and foreign capital, along with private buyers. Properties farther down the quality scale tend to trade primarily among private and local buyers.

A larger buyer pool can create a more competitive sale process, but it guarantees neither a sale nor a particular price. Large institutional buyers can step away from the market, and transaction volume for the largest properties has been running well below 2018 and 2019 levels.

There is also a more basic point that we cannot forget. A deeper buyer pool will not rescue an investor who overpaid at the beginning of the deal. The potential exit matters, but so does the price paid going in.

The Grade Is a Judgment, and It Can Change

It is also helpful to understand what the Class A designation is not. No government agency or central authority certifies a building as Class A. Brokers, research firms, and appraisers assign the classification using their judgment.

BOMA International, the industry body that publishes the definitions commonly used in the market, describes building classes as subjective quality ratings. The grade is assigned relative to a particular market rather than according to one national standard.

The classification also does not stay fixed forever. A building that qualified as Class A in 2005 might be considered Class B today. That does not necessarily mean the building became worse. Newer properties may simply have entered the market and raised the standard around it.

Over a five or ten year holding period, part of what a sponsor is evaluating is how long a property can remain near the top of its own market. That requires a judgment about the building, but also about the competing supply that may arrive during the investment period.

The Honest Trade-Off

Some investors prefer properties outside the top tier because they may offer higher stated cap rates. In certain markets, the data supports that argument. The trade-off is usually greater execution risk through renovations, more intensive property management, or a more complicated business plan.

The sponsor handles that work, but the limited partners still experience the financial result. This is why the quality of the operator remains so important in a passive investment.

Realberry’s position is not that Class A always performs better than other property classes. Rather, it is that for passive investors, the sponsor, market, purchase price, and business plan tend to matter more than the letter attached to the building.

What I Take From It

Class A is a description of building quality. It is not, by itself, a description of investment quality.

For me, that is the bigger lesson. We need to separate the quality of the asset from the merits of the deal before committing capital. A high quality building can still be a poor investment if it is acquired at the wrong price, financed poorly, or operated under an unrealistic business plan.

Class A exposure is also one component of a portfolio rather than a portfolio in itself. How much real estate belongs alongside other asset classes, and how that allocation is divided among property classes, sectors, and geographies, depends on an individual investor’s objectives, time horizon, liquidity needs, and overall financial circumstances.

Every portfolio is different. Our job as investors is to understand what the Class A label tells us, recognize what it leaves unanswered, and ask the remaining questions before committing our money.

What do you think? Does property quality play a major role in how you evaluate passive real estate investments? Let me know in the comments below!

References

Building Owners and Managers Association International. (2026). Building class definitions. BOMA International. https://boma.org/boma-standards/building-class-definitions/

CBRE Research. (2026a). Office. In U.S. real estate market outlook 2026. CBRE. https://www.cbre.com/insights/books/us-real-estate-market-outlook-2026/office

CBRE Research. (2026b). Q2 2026 U.S. office market report. CBRE. https://www.cbre.com/insights/figures/q2-2026-us-office-market-report

CoStar. (2026, June 1). U.S. hotel forecast assumptions – Q2 2026. https://www.costar.com/products/str-benchmark/resources/data-insights-blog/us-hotel-forecast-assumptions-q2-2026

CRE Daily. (2026, August 14). Class divide widens in US multifamily rent growth recovery. https://www.credaily.com/briefs/class-divide-widens-in-us-multifamily-rent-growth-recovery/

Dove, L. (2026, August 14). High-income tourism is “off the charts,” says Goldman Sachs’ Lizzie Dove [Video]. CNBC. https://www.cnbc.com/video/2026/08/14/high-income-tourism-is-off-the-charts-says-goldman-sachs-lizzie-dove.html

JLL Research. (2026, July 27). U.S. office market dynamics, Q2 2026. JLL. https://www.jll.com/en-us/insights/market-dynamics/us-office

All real estate investments involve risk, including possible loss of principal. Past and current market data does not guarantee future performance. Tax outcomes depend on individual circumstances; readers should consult their own CPA or tax advisor.