Office Condos: Opportunity or Not?
» August 22,2006 - Orlando
More upscale small business professionals are choosing to buy rather than lease. Commercial real estate practitioners explain what?s happening, sort out the pros and cons and point out the hot and cold office condo markets.
When developers bet big and build big in a market niche and then find that demand outpaces their inventory, you know it?s a hot market. Last October, developer Cameron Kuhn broke ground on Premiere Trade Plaza, a mixed-use project in downtown Orlando with nearly 400,000 square feet of office condominium space. Two months later, Kuhn, who is president and CEO of Kuhn Development, unveiled plans for Benchmark, a second downtown project with another 400,000 square feet of office condominiums. Then, in January, Kuhn announced the renovation of a nearby building, Cornerstone, which will have nearly 150,000 square feet of office condominiums. Just about all of it has sold.
Cameron Kuhn
?The Florida office condominium market fits perfectly with national trends,? says Kuhn, who reports 90 percent of the space in Premiere Trade Plaza and 100 percent of Cornerstone have already been sold. ?Business owners are moving back to the urban core to gain efficiency in their personal and business lives. When you can own your own office space, you get a return on your investment and asset protection as well.
?I believe office condos will be as widespread as residential condos in another decade,? he says. ?In places like South America and Australia, it?s common to own your own office space.?
Real or imagined market?
While Kuhn is one of the state?s leading advocates of office condominiums, he?s far from alone. Developers are taking advantage of current market conditions to build more office condo space, from large-scale mixed-use projects to smaller suburban buildings.
Vacancy rates of 15 to 20 percent in the state?s largest office markets, as well as rapidly rising land and construction costs, have discouraged speculative development of new leasing space. With new office condos, on the other hand, space can be pre-sold at an early stage in the planning and construction process, reducing a developer?s risk.
But not every commercial real estate professional believes condominium ownership is the wave of the future. ?More than 95 percent of office users are not looking at ownership,? says Larry Richey, senior manager director, Cushman & Wakefield, Tampa. That?s because leasing space provides organizations with more flexibility and many companies can generate higher returns in their core businesses than by buying real estate.
As a result, office condominium space ? even in Orlando and South Florida, which appear to be the state?s two strongest markets ? amounts to only a small fraction of the existing market. But an uptick in condo development activity may be creating new opportunities for Florida brokers and sales associates. As Richey says, ?We don?t track the office condo market, but it?s bigger today than it was five years ago.?
Who wins and who doesn?t
Traditionally, office condominiums have appealed to small businesses, professional firms and medical practices with stable business models. These office users typically purchase 1,000 to 5,000 square feet ? well below the focus of commercial brokers who traditionally look for tenants with far larger space needs.
PROS: In the past four years, a slow-growth national economy, historically low interest rates, and volatility on Wall Street have led many successful Florida professionals and entrepreneurs to look at alternative investments in the real estate market ? including owning their own office space.
?One of the key drivers of the office condo market is the prevailing rental rate,? says Kuhn. ?If new office space is leasing at $25 to $26 a square foot, and a user can buy new space at $16 to $18 a square foot, there?s an immediate return on that real estate investment.?
Because of the savings per square foot, many medical practices, laboratories, ambulatory surgical centers and other healthcare businesses find owning office space makes financial sense and provides a stable, familiar location for their patients. ?One reason why condo ownership works well for doctors and dentists is that build-out costs are extraordinary,? says Adam Von Romer, senior investment associate, NAI Rauch Weaver Norfleet Kurtz and Company, Fort Lauderdale. ?When you bring in water, vacuum, gas and air and electric to the center of the office, then repair the floor, it gets expensive quickly.?
CONS: On the other hand, much of corporate America prefers to lease office space ? a trend that shows no sign of abating, say Florida professionals. A Fortune 500 company with large space will invariably select leased space or a build-to-suit single-user investment. ?Most of the large consumers of space understand that owning the real estate is not a bright idea,? says Romer. ?A company like Walgreen?s makes a 40 percent return from its products and a 7 percent on its real estate.?
For national and regional companies, office condominium ownership has some significant potential pitfalls: it?s very difficult to move to a newer building, add more space to accommodate growth or downsize in the event of a staff reduction.
Disputes can arise among owners about the costs associated with maintaining common areas, allotting parking spaces or renovations to ?freshen? an older building. ?When you start dealing with larger users, a condo form of ownership for office buildings becomes complicated,? says Richey. ?A condo association can be a distraction from day-to-day business activities.?
Finally, condo ownership raises the question of an exit strategy: What happens when a small company closes its doors or an entrepreneur decides to retire? If it proves difficult to find a buyer who wants that space, the owner may need to sell at a discount.
Spotty Niche
New office condominium development varies widely in the state?s major office markets, with the most activity in Orlando and South Florida. Outside the major markets, Peter R. Harrison, senior vice president, Transwestern Commercial Services, Miami, says most office condos in smaller markets are typically two-story garden buildings with 4,000-square-foot floorplates. ?These seem to be fairly well received,? he says.
CENTRAL FLORIDA: Downtown developer Kuhn says more than 1.7 million square feet of office condo space is now under construction or in the planning stage in the metropolitan Orlando market ? the highest level in at least two decades.
?Several projects are underway in Orlando?s suburban markets, as well as downtown,? says Tom Hankins, president, Realty Capital, Orlando. ?The market for office condos here has not yet been completely realized, but there is great interest on the part of both owner-users and investors.?
SOUTH FLORIDA: Developer Kenneth Weston, president, Kenneth Weston & Associates, Inc., Miami, says about 1.5 million square feet of condo office space is now in the planning stage, primarily for healthcare users. ?We?ve been doing medical office condos since 1978,? he says, ?and professionals continue to buy them.?
Donna Abood
Office condos are being developed in almost every Miami-Dade County submarket, says Donna Abood, CEO, Abood Wood-Fay Real Estate Group, Coral Gables. Most new buildings offer space in the 1,000- to 3,500-square-foot range, Abood says, at prices ranging from $185 to $400 a square foot. ?The buy [vs.] lease comparisons depend on rates in any given submarket. In Coral Gables, for instance, buying space at $400 is comparable to leasing new office space at $30 to $32 a square foot.?
Miami?s Harrison says several existing office buildings are successfully converting into condos aimed at smaller users. ?It typically takes two years to deliver a new office building, and smaller users have an immediate need, making conversions more attractive to them,? he says.?
One of the driving forces in the Miami market is the desire from many South American business executives to own their space, according to Christopher Hamlin, senior associate, Goodkin Consulting, Miami. ?The South American market likes to own rather than rent,? he says. For instance, a large contingent of South Americans bought space in a recently completed office condominium building on Key Biscayne.
But with overall vacancy rates in the 20 percent range and significant tenant discounts on leased space, Hamlin believes developers have significantly overestimated demand for office condos. ?Many new buildings are experiencing slow sales,? he adds.
TAMPA BAY: Office condo development has been limited to smaller buildings in suburban markets, according to Richey. ?We have not yet seen any significant multi-tenant projects coming out of the ground with condo ownership,? he says.
Lynn Robbins
Lynn Robbins, an associate with Coldwell Banker, downtown Sarasota, recently helped sell the first office condo project in Lakewood Ranch. ?I started with large spaces, but everyone wanted a deal,? she says. ?When I redesigned the interior with smaller spaces, the offices sold rapidly for more money. It worked out well for everyone.?
JACKSONVILLE: James P. Citrano, managing director, CB Richard Ellis, says there is only one major office condominium in the planning stage: the 12-story Greenleaf Building. ?This is a unique downtown building that dates to 1927 with small floor plates of 5,000 to 6,000 square feet,? he says. ?There aren?t any new office condo projects in the suburbs.?
An infant market?
Florida?s office condominium market is still in its infancy, according to Harrison. ?Nobody knows the depth of the market today,? he says. ?In Miami-Dade it?s maybe 5 percent of all product being discussed and built ? but in other markets, it?s probably much less.?
Reflecting on the future, Hankins believes the office condo market will need to go through a full cycle ? including a downturn ? to determine the ultimate strength of demand.
?Right now, we?re on the early side of the cycle,? he says. ?It?s hard to tell what the market will be like in two or three years. But I believe when rates move up and vacancy rates on leased space go down, you?ll see more office development on a spec basis and a drifting away from the office condo market.?
Richard Westlund is a Miami-based free-lance writer.
About Kuhn Companies
Customer service is truly important to us and we strive daily to make sure each building and every space is perfect for our tenants and their guests. Kuhn Management has been adding to the development of Orlando for the last twelve years by purchasing old, rundown properties and turning them into unique buildings with distinct personalities.
Our goal is to create spaces that allow our tenants to be successful by creating an atmosphere that allows them to focus on their businesses without worrying about the buildings.
