|
|
|
|
home | testimonials | feedback | site map | |
|
|
|
| local articles & information | atlanta area demographics | links | |
A
New Type of Condo Market Picking Up! brought to you by
Chrissy
Neumann Dunwoody $160,000
****If
you know a friend, family member, or coworker who would like their
home featured as the "Tuesday Tour" email the details
to chrissy@castlesbychrissy.com****
Tuesday’s
Tip
Office
Condo Development Heats Up, From Phoenix to Atlanta
There's plenty
of demand for office condo product, too. Historically low interest rates
have sparked buyer interest and drawn attention to the perks of owning vs.
leasing. Condo ownership has the potential to offer big financial benefits
over the long term. Not only do buyers deduct interest on mortgage
payments, but they also acquire an asset that ideally will appreciate in
value over time. “The
condos are a nice alternative in a softer leasing market,” says Brian
Benninghoff, a partner at development firm Buchanan
Partners. Gaithersburg,
Md.-based Buchanan built its first condo project in 2000 amid declining
leasing activity. Buchanan traditionally focuses on land and building
development that includes one-story commercial and mid-rise offices in the
Northern Virginia and Maryland suburbs. But the success of that initial
development has prompted the company to tackle three additional condo
projects. “Some
would say that the demand for condos is being driven by low interest rates
or pent-up demand that will eventually peter out,” Benninghoff says. But
Buchanan Partners anticipates that condo demand will remain steady among
small business owners who have fixed real estate needs and recognize the
advantages of owning their own real estate. Who's
Buying? Commercial
condos function much the same as residential condos with buyers purchasing
individual units, which typically range from 1,000 to 10,000 sq. ft. Some
units, however, can measure upwards of 50,000 sq. ft. Condo buildings run
the gamut, ranging from one-story office buildings fronting premier golf
courses to downtown high-rises. The primary buyers are entrepreneurs and
professional service firms such as doctors, dentists, accountants and
other small business owners. On
the downside, there is always a certain amount of risk that comes with
real estate ownership, and real estate in general is an illiquid asset.
“The timing of when you need to dispose of an asset can be negative,
because markets go in cycles,” says Jonathan Serko, an executive director
at New York-based Cushman & Wakefield. In addition, condos are more
suitable to businesses with fixed space needs. Conversely, they are not a
good fit for firms that demand flexibility to expand or contract as their
business changes. Buchanan
Partners built the 145,000 sq. ft. Cascades Business Center in 2000 in the
Washington, D.C. suburb of Sterling, Va. Initially, Buchanan designed the
building so that it could be either leased or sold. But with a slow
leasing market, Buchanan opted to pursue condo sales. “We were surprised
with how quickly they sold. Through that we realized how strong the
commercial condo market was,” Benninghoff says. Based
on the success of Cascades, Buchanan started another project just west of
Dulles International Airport. The 105,000 sq. ft. Dulles Trade Center I
was completed last spring and is 80% sold. Buchanan also has broken ground
on two additional condo buildings at the Dulles Trade Center that are
86,000 sq. ft. each. Both projects are slated for completion in the spring
of 2004. Roots of
Popularity Although
newcomers such as Buchanan are just discovering the potential of condo
development, veteran condo developers are well aware of the projects'
rewards. The Griffin Co. in Atlanta, for example, has developed more than
1.5 million sq. ft. of office condo space throughout the Southeast since
the 1980s. “It
became popular because people liked the idea of owning their own little
office building,” says Joel Griffin, company chairman. As buyers become
more sophisticated, they recognize that they don't necessarily need to own
the whole building, he adds. Griffin first
introduced the office condo concept in a neighborhood-type suburban
project with multiple small buildings, each about 4,000 to 6,000 sq. ft.
Today, the firm delivers projects ranging from converted multi-tenant
office buildings to newly constructed high-rise condos. Currently, Griffin
is developing an 11-story, Class-A office condo building at the
intersection of Peachtree Street and Palisades Road in Atlanta. Griffin
expects to break ground on the $20 million, 145,000 sq. ft. building in
the first quarter of 2004 with completion set for the first quarter of
2005. One
of the most aggressive condo developers in the country is Scottsdale,
Ariz.-based Shea Commercial. The firm has developed about 500,000 sq. ft.
of office condo space in Phoenix since 1999, and currently has 700,000 sq.
ft. of office condos under construction in Maricopa County,
Ariz. Shea
develops low-rise, garden office buildings that are about 10,000 to 12,000
sq. ft. and are split into two or three units with individual entrances.
Construction costs range from $58 to $95 per sq. ft., depending on land
costs and site work, notes Jim Riggs, principal of Shea. The condo units
sell for $150 to $200 per sq. ft., an attractive fee for the developer
considering that the price tag is just for the building shell. Tenants
foot the bill for their own finishes, which typically run an additional
$30 to $40 per sq. ft. ‘An Exploding
Niche’ Traditionally,
office condos represent a relatively small market niche. In Atlanta, for
example, office condo space totals 9 million sq. ft. — about 7% of
Atlanta's total multi-tenant office market that spans more than 126
million sq. ft., according to the Dorey Market Analysis Group in
Atlanta. Office condos
are proving to be an increasingly hot commodity across the country. At
Shea, for example, typically half of the units are sold before
construction even starts. “It
has been an exploding niche,” says Donald Zeleznak, a salesperson with the
residential firm of Keller Williams in Scottsdale, an investor and broker
in office condo developments in the Phoenix area. Zeleznak is involved in
about a dozen different condo deals representing both buyers and
investors. “I think you have a large entrepreneurial base in the
Phoenix/Scottsdale market where the professionals see a real advantage in
owning vs. renting,” Zeleznak says. The
low cost of capital has certainly piqued interest in condo buying. “We
have seen a resurgence in demand over the last couple of years because of
the low interest rates,” acknowledges Griffin. Although the 10-year
treasury yield, for example, has crept up from a low of 3.33% in June to
4.25% in mid-October, it is still at its lowest point since
1963. Small
tenants who have not benefited from the discounted rents that have
surfaced in struggling office markets around the country also are driving
interest in the office condo market. “Small users under 10,000 sq. ft.
don't necessarily get the concessions that some of the big firms do,”
Griffin says. Office condo
development is not all that different than multi-tenant construction. One
distinction is that units need to be individually wired and metered for
utilities and possess separate property identification numbers for tax
purposes. Typically, a management association is in charge of property
maintenance and upkeep, which provides owners with a property that
functions much the same as any other multi-tenant
building. Small Business
Owners' Perspective The
target group for condo ownership includes professional service firms such
as Desert Mountain Family Dentistry. The company recently closed on a
1,600 sq. ft. condo at Shea's new Ironwood Office Suites in Scottsdale.
“Condos are an up-and-coming idea that is favorable to small business
owners,” says Stephen Itkoe, D.D.S, owner of Desert Mountain Family
Dentistry. “It allows you to buy a piece of property without the expense
of buying a piece of land and building your own
building.” Itkoe
has been leasing the same space for 17 years, and will be moving about a
block away to his new condo building when the tenant improvements are
completed in early December. Itkoe opted to buy the condo as a means to
establish fixed real estate costs and create a long-term
investment. Itkoe
paid $284,000 for the shell, and he views the purchase as a good long-term
investment for retirement, or a value-added asset if he decides to sell
his practice. “The stock market is so crazy, but with this you're putting
money into something that is a relatively stable investment,” he says.
Riggs estimates that condos in the Phoenix area appreciate at a rate of
about 4% to 6% per year. Buyers such as
Itkoe are being lured into condo ownership by incentives that include
appreciation, tax benefits and control of the property. “Depending on what
assumptions you use, a 10-year scenario of owning vs. leasing blows the
socks off renting,” Griffin says. Cost savings on owning versus leasing on
an after-tax basis over the long term can range from 25% to
50%. For
example, leasing a Class-A office space in the Buckhead submarket of
Atlanta, based on current market conditions, can cost about $21 per sq.
ft. gross. Factor in rent escalation over a 10-year period and the rate is
closer to $24 per sq. ft., notes Marc Fritz, a senior vice president at
Griffin. In
comparison, a firm buying one of Griffin's Buckhead condos would pay about
$235 per sq. ft. Factor in components such as tax savings and the value an
owner builds as the asset appreciates over time, and the net cost of
owning over a 10-year period is about $12 to $13 per sq. ft. on an
after-tax basis. Competitive
Obstacles Although the
returns sound attractive, office condo development presents challenges —
one of the biggest of which is finding ideal locations. “Office condos
don't work everywhere. The market conditions have to be right for it,”
Riggs says. Mature markets
can be difficult because the volume of second- and third-generation office
properties often creates an abundant supply of cheap leasing alternatives.
Growing markets with a high concentration of target clients —
professionals, service firms and entrepreneurs — are suited for office
condos, Riggs notes. In addition to Phoenix, Shea has targeted markets
such as Las Vegas and some of the growing suburbs in Chicago and
Dallas. Interest rates
also tend to influence buyer demand. “The risk that we have is that if
interest rates were to suddenly spike, it would take away what advantage
we have over the rental market right now,” Griffin says. However, interest
rates are so low that there is room for rates to move up 1% or 2% without
rates impacting condo ownership's competitive advantage, he
adds. Others believe
that the office condo market is less sensitive to interest-rate
fluctuations than Griffin indicates. Back in the late 1980s and early
1990s, Riggs was selling office condos in New Jersey when interest rates
were at 13%. “I
think the numbers still work when interest rates are as high as 9%, 10%
and even 11%,” he says. Interest rates
are only a part of the lure of office condos, Riggs notes. Condo buyers
are enticed by the package of benefits ownership provides, such as tax
advantages, control of the property and the ability to create stable real
estate payments rather than being subject to lease terminations and rent
escalations. Perhaps the
biggest challenge is determining the depth of the condo market. “Office
condos are not a niche. We see this product type in at least 10 states,”
Riggs says. In Phoenix's Maricopa County alone, developers will build and
sell over 1 million sq. ft. of office condos this year with 1.5 million
sq. ft. planned next year. According to Riggs, “Every multi-tenant,
multi-story office developer must consider this product type as direct
competition to their leasing program.” Beth Mattson-Teig is a Minneapolis-based writer FOR ADDITIONAL INFORMATION ON THE PROPERTY LISTED ABOVE OR THE TIP PROVIDED
|
|
