Office Condo Investment

9 Replies

Hi BP Community,

I would like to begin investing in commercial real estate.  I have come across office condos which have a lower entry point when compared to full buildings.  Does anyone have experience investing in office condos they would share?  Can you provide the pros and cons and what one should look for when reviewing?

Thanks,

Chris

Chris, my experience is that office condos can work as investments, but for the most part you are better off buying a building. The problem with office condos is that are usually targeted towards owner occupants. If a 1,000 SF space typically leases for $30/SF NNN, the developers will try to hit a price point that can be financed to match that. The benefit to the owner occupant is that they are building equity, and don't have to worry about landlords, CAM, or etc, but they pay for that with association dues (which eat up your cash flow). You may find success in older units, but I would think newer stuff would be tougher to make work.

Chris,

Unless its a high cap rate deal, with a great tenant in a great location, and you plan on holding for a very long period of time, I would avoid office condos. I'm a commercial agent in Atlanta and I just sold some office condos. It was quite a challenge and I would probably avoid office condo listings again in the future; they had been on the market for nearly 2 years before I got the listing. With this particular deal I was selling entire buildings, not just individual units, but they were within a condominium and still subject to association fees. They also had a NNN lease in place, meaning tenant pays for all costs associated with operating the building (including the association fees in this case). It was a great tenant, in a great location, and good cap rate, yet investors still scoffed at the idea of owning office condos. The reason is that you never truly have complete control over your real estate; you might have to pay for a portion of parking lot that doesn't serve your unit; there could be costly assessments that you're obligated to pay; maybe the roof of an adjacent unit has a leak and you get hit with higher fees to cover the repair; if you want to knock it down and build a new development, you probably won't be able to.

At the end of the day, I believe that people buy real estate for 2 reasons, one being more important than the other: cash flow and future pay off from a sale of the asset. Cash flow is great, but why purchase an asset if you can't sell it?? 

For these reasons, I would avoid buying office condos as an investment.

Do you mean retail strips? Those are great investments. Look for those along main commercial corridors or adjacent to a grocery anchored strip. Basically, you want them to have good visibility on a road with high traffic counts. If you can find one that's adjacent or within very close proximity to a grocery anchored strip, or a Walmart, Home Depot, or another well known big box store with non-credit tenants, that's a great investment. It's likely that rents will be below market and you'll be able (hopefully) to lease it to credit tenants in the coming years as well as raise rents.

I don't usually post here. But I do want to say that office condos as an investment is a great idea. I own several different office condos and have made nothing but more than expected cash flow and appreciation. It for sure is a niche market but when handled the correct way it yields astronomical returns. I think this is in part because of the fact that not very many investors know how to properly invest in the space or understand the sophistication of selling, leasing, managing, etc within the space.

Hi, for the purchase of an office in an office condo, would you base your offer on the usable sf or rentable (gross) sf? I know when leasing it is rentable sf but in the case of buying would the same apply even if you also have to pay monthly condo association fees.