As the residential real estate market slows, the commercial market may offer opportunity in a newly emerging trend—office condos. This trend allows smaller investors to enter the commercial real estate market for a much lower cost than purchasing an entire building.
Office condos are structured much like residential condos; buyers can purchase individual units in a large building. In some markets, office condos can sell for as little as $150,000, according to Commercial Investment Real Estate (CIRE) magazine.
“Demand…is spiking due to interest from buyers who want to purchase commercial real estate for investment purposes but can’t afford entire buildings,” according to CIRE magazine.
Office condo projects are cropping up in large cities and suburbs across the U.S., in markets as varied as Phoenix, Seattle, New York City, Miami and Austin, Texas. Some projects involve construction of entirely new buildings, but many are conversions of warehouses or existing buildings that are struggling to find tenants.
Larger investors can purchase a building or warehouse and condominiumize it, making a quick profit by selling in approximately eight months, according to The Wall Street Journal. This strategy is similar to those used by developers focused on residential condo conversions.
The trend appears in some unexpected markets such as Grand Rapids, Mich., which has 15 projects recently completed and on the market, according to a November 2005 report on the subject by Grubb & Ellis. “Phoenix, with 73 office condo projects recently completed, 20 under construction and 33 planned, is, without question, the office condo capital of the nation,” according to the report.
“Dallas, arguably the corporate hub of the Southwest, has two office condo projects recently completed, while Atlanta, its counterpart in the Southeast, has 17,” according to the report.
At the time of the report, the trend was absent in Los Angeles, San Francisco and Boston; the report attributed this difference to factors such as developers focused on this strategy, population and housing growth and the strength of the residential condo market. “In several markets, for example San Francisco and New York City, sources indicated that residential was simply the favored property type as it delivered the highest return.”
Because “the office condo market is just now emerging, with little if any activity even a few years ago,” it can be difficult to analyze and identify market trends, according to the Grubb & Ellis report. The infancy of the trend also means that many markets that currently lack office condos may well gain office condos in the future.
Most office condos range in size from 3,000 to 10,000 square feet, according to BusinessWeek.
“Office condos are mostly designed for small companies whose space needs are fixed for an extended period of time,” so they are ideal for small businesses with controlled growth, such as medical or legal practices, according to the Grubb & Ellis report.
The market of office condo buyers consists of both owner-occupants and investors. Smaller investors can purchase an office condo and either flip it or rent it out. Buying to hold and rent it out is less risky than flipping, of course, but it also comes with risks. Investors purchasing office condos with the intention to rent them out should ensure that enough demand exists and that the market is not saturated with inventory.
Commercial leasing does offer attractive benefits for small investors, including longer leases and the potential for better returns. Three- to five-year leases are standard and usually include options to extend the lease; moving a company is more difficult than moving one’s personal residence.
In addition, commercial tenants often take better care of the property because they host clients in the space and care about how it reflects on their company’s image. Many tenants will even put money toward improving the property.
The office condo market will likely remain a niche market because the end users of the property come from a limited pool, according to the Grubb & Ellis report. For some investors, this niche market may offer a welcome change from the nation’s struggling residential real estate market.