Last in our series, we’ll explore Class D assets. And specifically, commercial multifamily Class D assets. We’re not an operator of Class D assets, but we’re certain there are operators across the U.S. who have a distinct preference for Class D assets.
As we did with the other ‘Class’ blogs, we’ll break down some of the physical characteristics commonly found in Class D assets. Next, we’ll highlight where Class D assets sit within the fabric of our city neighborhoods.
Class D assets are generally categorized as follows (and remember: this list is not absolute, but more of a guideline):
- Built more than 40 years ago
- Functionally obsolete
- Non-existent or non-functioning amenities
- Deferred maintenance that amounts to 30% or more of the asset’s total valuation
- Code violations likely
- Original finishes or finishes that are grossly outdated
Especially relevant to our discussion of Class D assets is the neighborhood in which it sits. As noted in previous blog posts, there is plenty of economic viability to improving a lower-classed asset if the neighborhood is good. The reverse is not true however. If the neighborhood is of a lower class than the asset, there is little financial incentive to maintain or improve the asset.
Here are some key components to a Class D neighborhood:
- Population and households in decline
- Income well below national median
- Percentage of those living in poverty higher than in other neighborhood
- Property and violent crime typically well above national, state and local statistics
- K-12 schools that do not meet the standards set by local school boards
- Old retail outlets without an anchor store
- Local ‘mom & pop’ stores
While there may be an anomalous circumstance where some characteristics don’t present themselves, quite likely you would see the majority of these attributes in a Class D neighborhood.
Combining the physical and the neighborhood characteristics, a clear picture begins to emerge around where a Class D asset sits, and what kind of structure it is. And while it may not seem like a kind descriptor to those that live in these communities, they are often referred to as war zone properties.
It is important to note as well, that unlike grades in school, there is no ‘F’ class designation. That’s not to say that some assets wouldn’t fall below the Class D criteria we’ve outlined here, we believe some do. All sub-D class properties classified as Class D assets because the ‘F’ designation doesn’t exist in commercial real estate.
Class D assets can play a role in an investor’s portfolio, but it is especially important to weigh the advantages against the disadvantages of this class before jumping in with both feet.Tags: Class D, Class F, multifamily, neighborhoods, physical attributes