Office Condominiums On the Rise Across the Nation
Recent declining vacancies in office buildings have led to increased lease rates, making office condo ownership an even more attractive investment option for the foreseeable future. Although interest rates have steadily increased, lenders will continue to be more creative in their financing products, thus enabling more tenants to become office condo owners. Interest rates increases are not significant enough to override the numerous benefits of ownership which promise financial gains over the long-term. Among the benefits of condo ownership:
• Eliminates the risk of lease rate increases and terminations.• Expensive building improvements can be amortized at a reduced cost.
• Creates a beneficial tax deduction for high-income individuals, resulting in predictable payments which are less than the cost to lease.
• Enables owners to reduce loan balances and increase equity, enabling ownership of a building "free and clear."
Across the country, commercial condominium development has yielded high returns for investors. Office condominiums are uniquely positioned to meet the needs of small to mid-sized businesses, which 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.
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, creating an unmet need of tenants looking for smaller spaces.
Here are some of the traits we look for when developing office condos and why these traits may be desirable for tenants looking for a property to buy.
First: Location. Is the project in a highly visible location with good local and freeway accessibility? For medical professional buyers, 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, they should be built in areas that will appreciate or retain their value for at least 10 to 20 years. Our company does extensive market research to identify sites that also have a high traffic count and that are surrounded by other high-end office developments. 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.
The availability of adequate, convenient parking is just as important 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.
• Ensuring that news about office condominium developments and the company’s accomplishments are reported in the local news media.
Although office condominiums don’t work everywhere, they have evolved from a niche into a mainstream product. With net annual returns ranging from 20 percent to more than 30 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.
Jim Riggs is the CEO and founder of Scottsdale, AZ-based Shea Commercial, the nation’s largest developer of office condominiums and a leading commercial broker. For more information, visit the company web site at www.sheacommercial.com.
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