Apartments vs Office buildings

4 Replies

Hello, I'm currently researching about commercial properties and was wondering if anyone could give tell me the pros / cons of having one over the other. Which do you think is a better investment and why? 

Thanks, Michael.

@Michael Nguyen For the most part apartments "multi family" have higher cap rates vs Office Buildings. Commercial leases are more bullet proof in court vs residential leases.. Commercial leases are like guaranteed leases.. Landlord will likely win in court all the time for any default.. Residential leases will lean heavily on how the local county or township favors tenant and landlords.. Commerical leases are normally locked in much longer 2-5 years vs Residential 12 months.. Office Buildings may have NNN Leases were the tenant is responsible for all expenses tax, insurance and maintenance. All you do is collect a check whether it's to pay off your debt and keep in your bank account.. Some office buildings if it is occupied by one big tenant may have Absolute NNN where the tenant is responsible for tax insurance and maintenance as well as structure and roof membrane of building.. I am not too familiar of Office Buildings in terms of force appreciation but Multi family apartments offer that strategy.. Hope this helps Good luck

There is sooooo much to discuss when comparing the two. I think it is very difficult to sum up in a quick response. The short answer I would offer is that you cannot say one is better or worse than the other. It really depends on the individual property. I think multi-family is lower risk in general if you have a larger number of units. You likely won't encounter major vacancy issues and you can always reduce the asking rest to fill vacant units. Office property is a completely different animal influenced by different factors. If I had to pick one, I would choose the property type that is more in demand in your market for the next 5 years. Multifamily has been the preferred property type for the last 5 years but Class A has become overbuilt in some areas. Personally, I would stay away from any Class C office property. I think you can run into high maintenance short term tenants and get into extended vacancy issues. In addition, your pool of lenders will be smaller as many banks won't want to deal with lower stock office.

I would narrow down your question in order to facilitate useful replies.

@Michael Nguyen . I would agree with @Jon Mauro .

Banks are begging to take on MF loans, but are very tough when it comes to office buildings loans. 

Loan terms, amortization, Interest are a lot more favorable when it comes to MF. Office building are a lot more difficult to understand as there are many variants. In addition, if you own an office building, you will be negotiating against lots of very experienced people sitting on the other side of the table from you. You would need a very experienced Leasing agent to explain you all the tricks. The learning curve for office buildings is bigger.

Office buildings can be very profitable, however. If you find a good and solid long term tenant that signs a 5-10 year lease with typical 3% escalation ... That is what I like the most about office buildings. Turnover is not very high. Furthermore, businesses have an interest in keeping the space well maintained and professional at all time.

Therefore, businesses will not trash your office building like people trash your apartments. 

Not a fan of office unless medical office. Regular office when economy goes down business owners take less space, move to cheaper warehouse space, move to their house office to save money. It's not like retail tenants where they typically need a storefront and street frontage to do business.

Some investors will buy distressed regular office for cheap and then try to convert to retail or medical office at higher rents. The current use fails so they change plan to create value.