Like the residential condominium market, office condos are increasing in popularity as business owners seek to take advantage of low interest rates and other financial benefits associating with ownership. But the office condo market is still too new to predict whether the concept will stand the test of time, and rising interest rates.

If you're a broker interested in the office condo concept, you might be interested in the latest study by Grubb & Ellis and PNC Real Estate Finance.

"Office Condos: Here to Stay or Gone Tomorrow?" surveyed appraisers, developers and brokers in 41 markets throughout the U.S. in order to understand the office condo market of today and potential for the future.

The report defines 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 Robert Bach, National Director of Market Analysis for Grubb & Ellis, and co-author of the study.

Split results confirm Bach's findings, with some respondents stating that office condos have become a permanent niche in the office market, and others stating that the surge in demand will be temporary.

Co-author Elizabeth Ptacek, Senior Analyst, Market Research at PNC Real Estate Finance, said, "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."

Rising interest rates were noted as the most significant risk facing office condo developers over the coming years.

Some of the survey's key findings include:

• Office condo developers are active in smaller markets 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, but this trend 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.
• Office condo development is becoming more widespread in mixed-used properties with office and/or retail condos created on the first or first several floors.

The researchers concluded the office condo market is a market trend that needs to be watched, stressing that office condos are a legitimate and often cost-effective option, especially for some businesses seeking to service a particular neighborhood such as medical professionals, accountants and insurance agents.

A complete copy of the report can be obtained at grubb-ellis.com or pncrealestatefinance.com.

Published: December 16, 2005

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