Are Office Condos Poised for a Comeback?
As we monitor the actions of buyers and sellers in the current commercial marketplace, we can’t help but notice a lack of interest in the OFFICE CONDO property type. This comes at a time when prices for this type of property are at an all time low. Before the crash of 2008, the cost to build these office condos was in the realm of $150-200 per sq foot. A number of buyers paid that much at the time. We just sold one in Lake in the Hills for only $54 per sq foot, 1/3 to ¼ of what it originally cost to build it!
According to the Regional Multiple Listing Service (Midwest Real Estate Data), 12 of those office condos sold in McHenry County in the last year, one per month on average. 28 remain unsold (currently for sale). One can purchase an office condo for less money than a free standing building in many cases. There are even bank owned condos for sale where the banks are very motivated to get these assets off their books.
We hear objections to buying/owning this property type, some more than legitimate than others. The annual monthly dues is probably the biggest hurdle as all these condos are part of a Property Owners Association (POA). Most POA’s have professional management which is part of the dues structure. This is not necessarily a bad thing as good managers help maintain the overall quality and intrinsic value of the complex. If the Association dues are not high enough, you sometimes see shoddy landscaping or potholes in the parking lot. Also, the smart POA’s set up reserves for future capital expenses like new roofs, parking lots or exterior painting. If these expenses are not planned for, you can anticipate special assessments and nobody appreciates those. Asking to see financial statements, budgets and POA documents is a smart way to go about purchasing an office condo.
In addition to professional management , healthy financials and fair monthly assessments, most buyers look for various attributes of any office condo complex. Type of construction, location, whether it has a basement, crawl space or is on a slab (this affects ease of buildouts), internet access, adjacent owners or tenants, does it have private entrances, natural light, etc.
Using the Small Business Administration (SBA) loan to buy these condos is a commonly used financing mechanism. With as little as 10% down in most cases, you can own one of these units, which range in size from 625 sq ft to 5000 sq ft. or more. Timing is everything in life and it turns out that SBA loan interest rates have just dropped to all time lows (2.84-2.88% for their famous 504 program). You may also find conventional loan programs that are attractive.
The point is, if you are renting office space and plan to be in business for the foreseeable future, you should take a serious look at the office condo market while the pickings are still good. A good commercial broker can layout numbers for a prospective buyer to help decide if it is more economical to purchase or lease.