If you were able to raise some money (let's say around $2-$3 millions) and you were faced with the choice of either investing it into a small office building (roughly 25,000 sqft) or an apartment building (50 units). Both are rated B-class, have similar pro-forma NOIs. Both are located in the same city. The office building is 70% occupied, with one tenant occupying 1/4 of the space and paying about 30% below market leases. The Apartment Building is 90% occupied, but is older in age. 50% section 8 tenants. Not a lot of room for rent increases.
I know the answer would probably be "It depends". However, I would really like to hear from people who are familiar with both investment types, which one they would prefer (in general) and why.
My commercial broker has always made the argument that it is more difficult to evict from an apartment building than from an office building. Furthermore, businesses take better care of the property than individuals living in the house. I already own an office building (100% occupied) and I recently went through a lease extension with one of my tenants (inherited from the previous owner) and they wanted me to amend almost every line of the contract. They also wanted an exit clause on their own terms. Office building seem to stay empty for longer periods of time and sometimes, one needs to offer quite steep abatements to convince potential tenants to sign long term leases.
On the other hand, I feel that it is easier to fill an apartment building than an office building..
2 completely different ballgames.
Personally I am leaning towards commercial right now, but that depends on local economy. In my experience, office property is generally better taken care of by tenants, and usually comes with substantially less drama and BS than apartments with 50% sec8 tenants. However tenancy is different and each has their own unique challenges.
If commercial tenancy dips you will have a bit more flexibility to modify how you use the building - like full service leases or collaborative work spaces, etc... apartments are apartments, unless you make a big capital improvement and convert to condos, or make some other big changes.
while both are great, if the numbers were equal I would lean towards the office.
My first investment property was an office for many of the reasons that @Blair Poelman mentioned. It's a 4 office building that was vacant. In the first month, 70% of the space was filled, 6 months later I leased out the small office, but it took a year to get a tenant in the upstairs office.
My next property will be residential, but I'll be staying away from Section 8. I'm looking for a 2-4 unit that can be rehabbed into nice, high rent apartments.
Hope this helps!
My partner loves to say You can't live in the internet. Usually, B properties do not contain section 8. Office building has great upside, if you can buy on actuals. There may be a reason why it is 70% occupied though. Apartment has 5% upside.
I am biased because we own multifamily. I just see WEwork and people working from home changing the office space. If you are in an emerging market with jobs coming in, then office may have demand. As far as eviction, we give 5 day notice and can have tenant out within 30-45 days. Depends where you are. Good luck in CA (60 days to start).
I do not like the exposure of the one tenant renting 25% of the space. How long is their lease and are there escalations in rent, and are they a stable company
Thanks for the Responses. Both are located in the triangle area (Raleigh, Durham, Chapel Hill). Which has been one of the fastest growing markets in the USA the last 10 years.
@Gino Barbaro . The one business occupying the 25% is currently doing month to month at below market value. That thought scared me as well. Two other tenants just renewed for 3 and 5 years respectively.
@Blair Poelman . Thanks for the answer. Is your experience that office building might be more capital extensive?
@Bob Langworthy . Thanks for the answers. Do you remember the reason why it took a year to rent out the other office? Were you getting offers ?
@Henri Meli , the office that took the longest to rent out is on the second floor without an elevator. The three first floor offices are handicap accessible. I had 6 or 8 inquiries regarding the upstairs office and showed it to 4 of those. It was listed with a commercial broker as well.
In the end it was being on the second floor that was the problem.
sounds like you answered your own question!
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