June 25, 2008
Growth of Office Condo Market Powered by Low Interest Rate
The continued low interest rate environment, business owners’ desire to own versus rent and financial benefits have revived the office condominium market. However, the jury is still out on whether the office condo market will continue to thrive long-term, according to a new report issued today by Grubb & Ellis Company (OTC: GBEL), one of the nation’s leading real estate services providers, and PNC Real Estate Finance, a member of The PNC Financial Services Group, Inc.For the report, entitled “Office Condos: Here to Stay or Gone Tomorrow?” appraisers, developers and brokers in 41 markets throughout the U.S. were surveyed in order to understand the office condo market of today and potential for the future. The report’s co-authors Robert Bach, National Director of Market Analysis for Grubb & Ellis, and Elizabeth Ptacek, Senior Analyst, Market Research at PNC Real Estate Finance, define an office condo as an office building with two or more suites that are individually owned.
The owners of the individual suites own the remainder of the property in common. “The office condo market is too new to expect a definitive conclusion, but the findings provided insight into a rapidly expanding market niche,” said Bach, adding that the growth of the office condo market, which caters to small businesses, dovetails with the fact that today’s fastest growing companies are small businesses.
Ptacek noted, “If one assumes that there has been a fundamental shift in the way that real estate is perceived as an investment, then office condos are likely here to stay, remaining a legitimate, if tiny, segment of the office market.” Respondents surveyed were split, with many stating that office condos have become a permanent niche in the office market and others stating that the surge in demand will be temporary. Rising interest rates was noted as the most significant risk facing office condo developers over the coming years.
Some of the key findings include:
- Office condo developers are active in smaller markets where you might not expect them to be, such as Grand Rapids, Mich., and are all but missing in some much larger markets, including Los Angeles, San Francisco and Boston. Growing markets with a high percentage of service clients serving the local population and business base are well suited for office condos.
- Office condo development is linked to population growth as well as the cost of development and the strength of the residential condo market. Phoenix, with 73 office condo projects recently completed, 20 under construction and 33 planned, is the office condo capital of the nation.
- Over 60 percent of the brokers surveyed believed that one of the most important factors driving demand is the desire to control occupancy costs. With financing favorable and tax benefits available to condo owners, tenants are comparing the costs of renting vs. buying, with many finding that buying is a better option.
- In some markets, such as Chicago, the trend has been to convert existing hard-to-lease buildings. This may be slowing. As leasing markets improve and sales prices continue to rise, converters may have difficulty finding properties to convert at a price that makes sense.
- Nearly 60 percent of brokers give future development a yellow light – proceed with caution, while over 30 percent give development a green light. Less than 10 percent stated that office condo development is not a good idea.
- In many markets, the financial returns to develop other property types, such as residential condos, is much greater than for office condos.
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