This is part one of a three part series on office condominiums. With the economy improving and the office market on the rebound, office condominiums are once again making sense to corporate occupiers. The commercial condo market is a niche market consisting of only a small fraction of the entire inventory. Office condos generally gain popularity when rental rates are increasing and companies try to lock in their real estate costs. The market reached its peak in 2005-2007 as office vacancies declined to historical lows and rental rates escalated rapidly. As the economy hit the brakes in 2008, rental rates nosedived and leasing office space made more sense than owning. Fast forward to 2014 and we see vacancy rates declining, rental rates trending upward and office construction at a near standstill while interest rates remain historically low. At Brenner Real Estate Group, we are expecting an increase in demand for office condominiums and are considering converting Cypress Commons (pictured below), one of our investment properties to a condo. Here are a couple of our prime commerical condo listings in Fort Lauderdale and Boca Raton. Is the market ripe for a new wave of office condo conversions and new development?
Real estate is one of the largest components of a company’s overhead. Most firms lease their space and for many, that is the proper decision. But for others, owning your own space, (whether it’s an office condo or your own building) makes a lot of sense. All we ask is that you take a moment to reconsider the office condo market. Here are our top 5 reasons why. Of course, Brenner Real Estate Group provides expertise in this market and we’d like the opportunity to help you find the best space for your needs. Determining whether it’s best to own or lease is a key to finding the right space in the right place.
1. Prices Remain Attractive
Prices in the office condo sector peaked back in 2007 before the market overheated and the great recession took hold. While prices are again on the upswing, many office condos are still being offered at up to 50 percent below peak values. While we wouldn’t have recommended that you pay peak rates of over $300 per square foot for suburban office condos back in 2007, we see excellent value in today’s market.
2. So Do Interest Rates
No, interest rates are no longer at record lows, but rates of under 5 percent are still available for office condo buyers. Your mileage may vary based on your time in business, credit rating, your down payment and amortization term. But it remains likely that you can own for less than the cost of leasing. In addition, mortgage payments, unlike office rents, do not increase every year.
3. Surprisingly low cash requirements.
The Small Business Administration’s (SBA) 504 and 7a programs require only 10% down. Plus, you can finance your closing costs and improvement expenses. The downside of SBA loans are the increased approval times and higher fees. As an alternative, some lenders are providing 85% non-SBA financing while others are providing attractive terms on personal loans to qualified customers.
4. And where are you putting your money anyway?
We’ve had a nice run on the stock market, interest rates are so low that bonds may not be the answer, and 1% from the bank is nothing to get excited about. Real estate (see #1) isn’t a bad place to be. And by investing in your own office space, there is a good chance you’ll have a lot confidence in your tenant.
5. Can we get a little appreciation ?
A few years back, there was little likelihood of selling an office condo for more than you paid. But if you follow the office market, you’ll see that vacancies are trending downward, rents have stabilized and there is virtually no new office construction in the pipeline. We’re not saying that prices are ready to spike upward, but downside risk has certainly diminished. Even a small amount of appreciation in an office condo can significantly reduce your effective cost of occupancy.
There is no denying that residential real estate values are headed upward. Commercial properties are also on the way back. It follows that there is a strong likelihood that office condo values will also increase in the coming years. For example, we sold a condo in Emerald Hills Office Park (pictured below) in Hollywood at the height of the market in 2007 for $231 per square foot. An affiliate of the same buyer purchased a similar unit last year for $95 per square foot. The same unit is now on the market and scheduled to close at $151 per square foot. This shows not only that prices are on the way up, but they are still well below peak values indicating the potential for more appreciation.
At the risk of sounding like a prescription drug advertisement, here is our disclaimer. Office condos are not for everybody. If your space needs are fairly stable, you don’t intend to relocate in the near future and you have 10 percent or more to put down, purchasing an office condo or your own building makes sense. It is also highly advisable that you consult your accountant, your financial planner and your attorney before taking the plunge. And of course, don’t forget your commercial real estate broker. A good broker can uncover hidden opportunities in the market, connect you with the right lender and find the best commercial real estate solution for your business, whether it is leasing, buying a building, or purchasing a condo. Your sister-in-law who dabbles in the residential market may stumble across something, but you will be much better off working with a professional who truly understands the value in the market.