I am in the early stages of deciding whether to build an office building. I own a non-real estate business and have rented space for a number of years. Ideally, what I want to do is build an office building that is larger than needed for my business and lease out the remaining space. This a very large investment so, I would like any advice that someone who has done this has to offer. So far in comparison to residential, everything seems to be disproportionately more expensive. If you have built an office building, message me on this forum or privately. Any advice is appreciated.
I have not built an office building.
Having said that look for vacant structures or buildings that have been foreclosed on where you can repurpose the outside and inside for way less than replacement cost. You can also get an existing office building in some form of occupancy distress for cheap and turn it around. You do not want to build new if you don't have to for your purposes.
There are many cases of office space contracting so even if nothing new is built buildings have extra space hitting the market. For example a market where nothing Is being built for office but existing tenants decide they want 40% less space when the renewal comes up. All of this space saturation puts pressure on rents for office space along with any foreclosures where you can buy for a cheap basis and offer lower rents then someone with a high debt service to fill up quick.
Building ground up has the most risk, the most time consuming, and generally costs more money than anticipated. I see properties all the time where a developer overbuilt and now the bank is taking a loss because the developer handed back the keys as they are not getting the expected estimated rents with the market dropping. Their pro-forma rents were based off of a market that was really hot and the bottom dropped out.
@Brad Williams What Joel says has a lot of merit, and if you can find a newer building that is discounted to sell quickly or a bank owned property, it can be a good deal.
Also, it would help to know what the local real estate market for office space is like? What is the availability of space, and rents? What made you want to build? What type of business do you have? How many square feet do you need? How much additional space did you want to build? Do you currently own the land on which you want to build, or would you need to purchase? What does land suitable for the building size you want sell for?
Though buildings can be remodeled, and re-purposed, you still have an old building that's been remodeled. Also, older buildings would need to meet the current health and safety codes, and you'd want to make them energy efficient. Most older buildings have 8' ceilings, and everyone likes higher ceilings now.
Newer buildings on the other hand are designed with more modern amenities, wider halls and restrooms, energy efficient heating/air and windows, wired for high tech uses, etc., and usually have more parking. They also have lower maintenance costs, and higher appreciation.
If you have a use such as medical etc. that is more specialized building new is often much cheaper than trying to remodel an older building and retrofitting, etc.
We have built several small office buildings 3000-10,000 sq. ft. etc.
I have a medical billing company. I do agree that an existing building that could be retrofitted would be preferable from a cost point of view but, I have looked for about two years for buildings that are on the market to buy and have not found any that are suitable. I have looked at a few dozen. Typically the issue with existing buildings is adequate parking and appropriate size. We need about 10 parking space per 1000 square feet. For our needs, we currently rent 13,000 square ft so, I am planning to build 20,000 sq ft +/-. The only existing buildings in my market that meet those requirements are retail buildings which could be converted for our use but, typically retail space that are good deals (foreclosure, bank-owned, etc.) are in very undesirable areas or are too small or much larger than I want to take on. Land is certainly not cheap ($5-9 sq ft.), especially since I have been told that I need a minimum of 3 acres but, there are a number of bank owned lots in my target area for less ($3-5). Total cost is currently estimated at around $3 million with rental rates in the area in the $18-25 per sq ft range for class A space.
I would be looking at either modular or repurposeable construction if you have to construct something. That would give you an exit scenario. As @Joel Owens says, the bottom has fallen out of this market, office space is going the way of horse stables.
This might be a stupid idea in your case, but have you thought of moving outside your market if nothing can be found nearby? Don't know how local your business is, but you might be cheaper off doing so.
This post has been removed.
@Brad Williams Hey Brad for learning purposes it would be great if you blogged through your entire constriciton process. That is if you decide to build from the ground up. I have a few resources but they are in the NYC area which is little use to you.
Go with the low end the 18 sq ft. If you get higher great but if not you are doing well as you made the numbers great off of 18 and not getting 25.
A bank foreclosure lot can be a great deal especially if it's already scraped and cleared. Generally you won't find 3 acres that way as it's usually outlots at 1 to 2 acre parcels the developer walked away from. You could possibly put a few together.
Medical office is one of the areas that is strong in the office sector.
@Brad Williams Parking is usually the biggest issue. However; general office space requires less than medical. Therefore; when planning a project, if you want to attract medical users, keep that in mind.
Since you have no experience developing such a project, contact a few local developers and ask them about doing a build to suit for you, where you will purchase the land, and they build the project. Tell them that you want a cost effective design. The simpler the design the cheaper the build. That doesn't mean you can't have some style, but the closer to a box you stay, the cheaper, and waste as little space as possible, but don't be so tight that it is unappealing.
Also, it's a good idea to design to specs for office condos if it's not a big cost difference. Having condos gives you far more flexibility with your space. You may choose to lease or sell some out in the future, etc., or if you want to borrow on it, you have more than one unit that can be used etc.
You might want to get some pics of buildings you like to show the builder, that way you are both on the same page.
Make sure when talking to a builder you ask for addresses of projects they have built, (you can look at them on Google Earth if they're not local), a list of references (and check them! ask if they were on time and stayed within budget), check licenses, bond, etc. Also, find out if they actually use an architect or a draftsperson for the design, or a combination of both (we personally have a draftsperson do preliminary design and an architect do final check and put in notes as it saves a lot on costs, then our structural engineer signs off on his part)
Another way to save money is on the commission on the land. If you are able to negotiate your own deal with the bank you will save there. If the property is listed, you may be able to work a deal with the listing agent to write the offer, but at a slightly discounted commission, since you found the property yourself, etc.
Talk to a couple of different builders. I would suggest using someone local, as every town has their quirks and someone that knows the process of the area and has gone through their planning and building process helps shave off time. They don't necessarily need to be from the same town, but at least neighboring area.
I hope some of this is useful. Good luck!
Thanks to all for the advice. @Joel Owens you advice is very good and conservative as I usually am. As I said in an earlier post, if I could find a building in the right area to repurpose that would certainly be the way to go. I will keep you posted as things develop. @Karen Margrave thanks for your advice too, I may call up on you for more advice as I get a little further along. @Chad Bernstein I will keep everyone posted on the progress.
Join the Largest Real Estate Investing Community
Basic membership is free, forever.