Office Condominiums Boom Despite Poor Economy
[ Modified from an article by Jim Riggs, the CEO and founder of Shea Commercial]
Office building construction has slowed or halted in many parts of the country due to lease rates that have leveled off or declined and mounting vacancy rates. One bright spot, however, has been office condominiums, which have continued to gain in popularity.
Last year, The Wall Street Journal's RealEstateJournal.com noted in an article, "Amid Low Interest Rates, Office Condos Multiply," that "while average office-rental rates in Manhattan have fallen about 30 percent during the last three years, prices for office condos have increased 50 percent during the same period." Skyline News & Research newsletter reported that "In Florida, Arizona, Minnesota and cities such as New York, Atlanta, Washington, DC, and Los Angeles, commercial condominium development has yielded high returns for investors."
Why Has This Market Segment Done So Well?
Office condominiums are uniquely positioned to meet the needs of small to mid-sized businesses, usually firms such as medical practices, dentists, lawyers, engineers, accountants, architects, real estate companies, mortgage brokers, insurance brokers, general contractors, dance studios and other service-oriented businesses with established practices. Business owners and partners in these organizations are receptive to the benefits that owning versus leasing office space provides. They welcome the opportunity to buy property without the expense of purchasing land and the aggravation of supervising the construction of a building. Benefits of ownership include:
- Significant tax advantages
- Building equity
- Property appreciation
- Completely customizable space
- Predictable, stable monthly expenses
- Locking in a prime location even if rents spike
Office condominiums are also an attractive option because many cities have an under-supply of small buildings in the 1,000- to 5,000-square-foot range available for purchase. For example, according to the Skyline News & Research newsletter, tenants with space requirements of less than 10,000 square feet comprise 80 percent of the marketplace in San Francisco. Office condominium developments, which typically offer space from 1,000 to 10,000 square feet, can help to satisfy this unmet need.
Meeting the Needs of the Target Market
As with any real estate development, the most important element for success in developing office condominiums is location, location, location. Most projects are located in highly visible locations with great accessibility and accessibility to a freeway. Since many purchasers are medical professionals, the ideal location is on a major thoroughfare, close to both a freeway and a major medical center.
Because office condominiums are a long-term investment, it is vital that they are built in areas that will appreciate or retain their value for at least 10 to 20 years. Existing office tenants who want to stay in a convenient location for their patients, clients or customers are an excellent source of future office condominium buyers.
Nearby residential neighborhoods should be populated by white-collar workers with higher than average annual incomes. Not only do these demographics support the long-term prosperity and desirability of an area, but also, local business owners often decide to reduce their daily commute by buying office condominiums near their homes. The needs of small and mid-sized established businesses are often more specific than those of larger companies. They are more cost conscious and do not want to purchase excess capacity. This requires working very closely with potential purchasers to help them design a space that will meet, but not exceed, their current and future needs.
Small and medium-sized businesses may not have the in-house resources needed for the due diligence required to get the best deals and are vulnerable to being short-changed in the market.
The buildings are designed to easily accommodate three to four tenants per building. To accommodate multiple businesses, Each tenant has a separate entrance, easily seen signage and separately metered utilities. The roofing, windows, walls and heating/cooling systems are designed for energy efficiency.
The availability of adequate, convenient parking is just as important to an office condominium development's success as the buildings and amenities. Several marketing tactics help generate interest and sales in new office condominium developments. They include:
- Successfully completing projects and developing a track record of quality construction and sales performance.
- Communicating frequently with local brokers.
- Sending direct mail marketing pieces to local businesses.
- Cross-marketing multiple properties and projects.
Financing Assistance for Buyers
Although office condominiums don't work everywhere, they have evolved from a niche into a mainstream product. With net annual returns ranging from 15 percent to more than 40 percent, the likelihood of continuing low interest rates and the pent-up unmet demand for the long-term financial benefits that office ownership provides to small and mid-sized businesses, the outlook for office condominiums is extremely positive.
, the largest developer and broker of office condominiums in the United States.
"Although office condominiums don't work everywhere, they have evolved from a niche into a mainstream product." "Office condominiums are uniquely positioned to meet the needs of small to mid-sized businesses, usually professional service firms, small businesses and entrepreneurs. "