Commercial real estate properties are often categorized into classes based on various characteristics that can impact their risk and return potential. Class A properties are generally considered the highest quality, with newer construction, prime locations, and desirable amenities. These properties tend to command the highest rental prices and may have the least risk for investors. Class B properties are typically older buildings that may have been renovated to be more competitive in the market. These properties may offer more value to renters, but may also come with higher risks for investors compared to Class A properties. Class C properties are generally older buildings located in less desirable areas and may offer lower rental prices, but also come with higher risks for investors.
Rent concessions are discounts given to prospective tenants by property managers in order to encourage them to sign a rental lease agreement. These concessions can come in the form of reduced rent, free rent, waived fees, relaxed security deposits, or gifts. They are often used by properties with high vacancy rates as a way to increase occupancy. There are two main types of rent concessions: upfront and recurring. Upfront concessions are one-time discounts, such as a free month of rent, while recurring concessions are ongoing, such as reduced rent for the first six months of a lease. It is important for real estate investors to understand the history of concessions at a property and to consider them in their proforma analysis in order to accurately forecast investment performance. Other factors that can be used as rental incentives include flexible lease terms, upgraded units or amenities, and waived application fees or security deposits. It is important to thoroughly analyze and underwrite concessions in order to make informed investment decisions.
Learn the key distinctions between common equity and preferred equity investment in multifamily real estate and how they can impact your return on investment and level of risk.
