Commercial Condo Investing?

Question

I was speaking with a much more experienced investor last night at my local REIA and he mentioned one of his strategies is investing in "commercial condos" or small office spaces. He said the return is pretty good percentage wise, and since it is a "condo" he personally doesn't have to worry about repairs. He pays association fees and those go towards common area/building repairs. I'm wondering if anyone else invests in these, and if so, have you found them to be worthwhile?

Thank you!

Evan Polaski · Answer

@Richard Anderson, I do not have personal experience.  But, just a comment on "don't have to worry about repairs", the same logic can be applied to investing in residential condos.  HOAs "handle" all of the repairs, until they don't.  Don't get me wrong, some condo associations are great, stay well funded, and manage the common areas as the condo owners would like.

And, to Chris's point, every investment has its own set of risks and rewards.  Generally, people tend to have personal biases towards what they are doing.  Maybe this person used to own a business that rented from a condo owner.  And therefore he started buying them.  Other people think it is better to develop office condos and sell them off.  While I always like hearing other people's ideas, and some will turn out to be worth pursuing, one person's excitement, to me, is only valuable to plant a seed and start looking more into the opportunities, and studying the risks.

Things I will note, depending on what you are comparing to: office investing is generally some of the least active management.  Typically, at most you will get calls during office hours. Similar to industrial.  The typical office tenant is fairly light on their space, i.e. professionals tend not to be moving big heavy things around, banging into walls, etc.  Alternatively, not everyone is looking for office space. In my experience, office condos tend to be on the smaller side, and smaller companies need smaller spaces.  They can be very hard to divide into multiple units, and since you likely only own one, you cannot expand into adjoining units.  So you are sort of limited to your set sq ft.  Smaller businesses, typically, do not have the same financial wherewithal of larger tenants, so economic shifts disproportionately have an impact on smaller companies.

Chris Seveney · Answer

This will be location by location specific. There are pros and cons to these types of proeprties. I am curious how long have they been in this business. Typicaly if we see an economic recession (more than likely) these smaller shops will sit vacant as smaller businesses usually take a brunt of the pain during these types of economic conditions. They are not a bad investment, but like any investment need a lot of planning and due diligence on what is your strategy and exit strategy.

Henry Clark · Answer

OP  I use a company at one of these types of locations.  Modernworksuites.com  You might look at their website.  The first time I went there, seemed very unusual from my Corporate setting background.  But the facilities had a techy retro environment feeling, support staff onsite, shared common areas, kids play area, coffee/snack booth, unusual mixture of clients, great parking, etc.  Looked like a 3 story warehouse facility retrofitted.  From a development standpoint, you could develop a floor at a time.  You could offer mixed sizes although most were smaller.   The office I went to was only about 15 x 15.  For their type of business, they would never conduct at their house for security reasons.

To me this model is very similar to our Self Storage.  You have no clue who or what might want to rent.  Easy clean up and switch over between renters.  Very little renter support needed.  Example common bathroom versus each unit.  The large issue is your Entry cost and size of entry.  You would have to cover the Carry cost until you hit your break even occupancy percentage.  Which is a little more scary for a new product like this versus say Self Storage or an apartment complex where your market study is a little more common.  Plus, they get a better centralized address or location than if they individually sought out a separate office building.

Richard Anderson · Answer

@Chris Seveney @Evan Polaski

Thank you for the input! Many of the items you mention we discussed during our conversation. I've known this person for several years now and he has a portfolio of everything from multi-family, condos, office condos, and commercial space. He owns several office condos and it sounded like an interesting investment idea the more we discussed them. One of the things he mentioned was that even though they can throw off decent cash flow, at some point you outgrow them, and then you have to decide if you want to keep them or 1031 them into something else and all that involves. He owns well over 100 doors of various types, so I can see where he's coming from. But from my standpoint, it sounds like a good problem to have - as I sit here with my two properties. ;)

Commercial Condo Investing?

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