By Katie Kirchner, Partner at Strategic Sites Clifford Commercial
By definition, an office condominium is an office building with two or more individually owned units. The balance of the property, such as parking lots and landscaped areas, is considered common area and is owned and shared by all of the condo owners, usually managed and maintained by a condominium association.
Office condominiums are not new to Northeast Florida but after a lull in new projects, there has been a resurgence of condominium development responding to area growth, specifically in markets to the south.
With projects planned or underway at Nocatee, Durbin, Greenland Road, Alumni Way and more, it is clear that the demand is there.
Condominium projects provide an opportunity for small business owners to own their space, usually near their home or client base, with manageable square footage and efficient layouts.
Condo projects are typically delivered one of two ways – cold dark shell (slab, plumbing stubbed, electric brought to the building and demising wall) or built to a standard floor plan (or modified based on the buyer’s requirements).
Part of the appeal is that buyers have the ability to have their unique floor plan needs met or know that they are purchasing an efficient floor plan, with broad appeal. The “standard floor plan” generally consists of four to five offices, a conference room, kitchenette, ADA compliant restroom and reception in about 1,200 square feet.
The ability to combine units provides for future growth and expansion and possible rental income upfront.
But how well do these projects hold their value? History has shown that they aren’t recession-proof, regardless of location, build-out or developer.
In 2009, 2010 and 2011 Northeast Florida saw many of these projects riddled with issues. Whether it was owners in arrears with the association, units in foreclosure or massive vacancies, many of these projects were hit hard. This allowed for great opportunities for investors and resourceful buyers, but didn’t bode well for market values.
Most would agree that we currently are in a strong market – values are increasing, interest rates are relatively low and funds are available for business owners.
However, inventory is tight. Growth and development is surging in our outlying areas but opportunities in the Riverside, San Marco, Southside, Mandarin or Beaches markets are limited for owner-users.
These dense markets don’t allow for much new development so prospective buyers are at the mercy of resales. This drives the price up to where a buyer asks, “Will I get my money out when I sell it down the road?” as an owner-user and “Can I lease it for enough to achieve my desired CAP rate?” as an investor.
Is this the beginning of a cycle that we should all recognize? As values and purchase prices continue to increase, can the market sustain it?
Most owners of office condominiums are small business owners, a large percentage run their business out of their unit. The investors tend to be local, not REITs, with expansive portfolios or giant corporations.
The owners of office condominiums focus on this product for a variety of reasons but a common factor is that overall it is “safe” real estate, if such a thing exists. The overhead is minimal, the efficiency of the space is unmatched and as long as there are small businesses, particularly service-related, the demand will be there.
Northeast Florida is experiencing huge growth. With our variety of submarkets and trade areas, we are perfectly set up for office condominiums.
Satellite offices, large pockets of residential that require services close to home, and local investors that believe in the area’s growth – these are just a few reasons that office condominium projects will continue to be successful.
I look forward to watching these new projects enter the market and selling a few to my clients.
Katie Kirchner is membership committee chair for the NAIOP Commercial Real Estate Development Association Northeast Florida chapter.