What and How Does Office Condos Work

by : Jeff Hammerberg

The condominium concept emerged in the 1970s as a unique alternative to traditional apartment leasing and single family home ownership. At first the idea – which involves partial ownership in a larger collective or association of similar properties – gained traction in vacation destinations. Instead of forking over excessive amounts of money to buy pricey beach property, for example, a buyer could buy one slice of a larger pie at a more affordable price. And as an alternative to perpetual rental – which offers no tax benefits or equity accumulation – owners could purchase their apartments or holiday retreats, without having to buy an entire apartment building.

Now the same idea is spreading within the market for traditional office space, where a condo office is defined as an office building with two or more individually owned units. The rest of the property – for example the parking lot, landscape and lobby – is owned in common and equally shared by all of the condo owners. In other words, condo ownership of an office works the same way it works in a residential condominium setting, and the terms of ownership are outlined in office condo association by-laws.

During the 1990s developers in many cities around the country overbuilt office space to keep pace with the exploding high-tech industry. But then the industry shrank as many of the start-up “dot-com” companies that the offices were meant to house went out of business. Many of those costly projects were hard to sell, because the need for huge office property evaporated, leaving developers saddled with inventory and financial liability. They offered to sell off offices piecemeal, rather than waiting to lure well-heeled buyers who could afford the whole building.

Suddenly the condo office frontier was discovered, as innovative commercial brokers began to divide up skyscrapers and sell single office units or floors of office space, rather than trying to market the whole enchilada. The concept caught on, and continues to be a popular and less investment-intensive alternative for those businesses or professionals who would like to own their own office but don’t want to build or purchase an entire building in order to do so.

Occupancy costs combined with the loss of potential financial incentives usually weigh heavily into the choices of those who opt for the office condo alternative. Most office condo owners cite control of their property as the most compelling reason for the purchase, and they list tax perks and financial advantages as other contributing influences affecting their decision. If you rent or lease, your ability to redesign and remodel may be limited by the flexibility of the landlord. And if you decide to move, you may have to forfeit penalties for short-circuiting your lease. Even if you time the relocation to coincide with the expiration of your contract, you never get to enjoy equity appreciation like you do with owned property.

Availability is another powerful issue, because someone needing a relatively small can find office condos in a variety of sizes and configurations, even in the most popular parts of town. Office condos are especially popular with those who want to establish themselves in a specific location where buying a building or constructing their own is not practical. Small professional firms can buy condos that range from 1,200 to 50,000 square feet, inside large buildings in competitive markets like New York, Los Angeles, Chicago, or Washington DC. Office condo development is also becoming more common in mixed-use properties where office and retail condos are designed into the first floor of a residential condo project. You can buy your home upstairs, open your wine bar downstairs, and visit your corporate accountant or attorney in their office condo next door.

As condo owners outgrow their original offices, they often acquire another condo in the same building or purchase strategically located satellite office condos. Thanks to the potential to profit from market appreciation, many office condo owners finance their expansion and relocation through sales of existing sites, just as first-time homeowners trade up to larger homes.

Right now the market for office condos is relatively new and somewhat untested. But as companies increasingly shift to a virtual online presence versus a brick and mortar headquarters, the demands for gigantic offices may fade, in favor of agile and adaptable office condos.

Flipping office condos may become the next bull market opportunity, and those who already own them may be well positioned for the future. Residential condos were considered an inferior investment vehicle when compared to single family homes, until about a decade ago. But then they caught up with and surpassed traditional homes in popularity and investment performance.

Regardless of what investment yields they offer, office condos are already convenient and economical, and those are the most important reasons why many experts believe they are the way of the future.