Foreign investors have been flocking to luxury preconstruction residential towers in the current market cycle, but a new venture option that offers immediate revenue-generating income is turning heads: office condominiums.
An office condo building offers investment buyers an opportunity to own a part of a commercial property.
The significant uptick in office condo interest is so evident that developers are converting older buildings or new-construction lots to meet the demand for these types of investment opportunities. According to CoStar, during the first quarter of 2015, for example, only two buildings totaling 56,942 square feet were introduced to the market in Miami-Dade County, making it apparent there is a considerable lack of new office construction inventory.
In the case of One Flagler, an office condo building designed by Morris Lapidus in the heart of downtown Miami (and for which Fortune International provides the sales and marketing brokerage), the commercial space is pre-leased, thus eliminating the buyer's potential concerns of vacancy.
Prior to the country's economic crisis, office condos such as 1110 and 1200 Brickell, also managed by Fortune International, were experiencing successful sell-rates, but then came into a period of inactivity. Now that the real estate market has gained momentum, office condos have made a triumphant return. Here are five things you should know about office condos:
Miami office rents continue rising. End-users who plan to stay put for over three years could benefit from purchasing office space rather than paying off the landlord’s mortgage. On the tax front, owners can discount the expense of commercial real estate.
Office condos diversify investor portfolios at affordable prices. In a Miami residential market that ebbs and flows, securing ownership in the office market will hedge against declines. While most of these properties are expansive and come with a high price tag, office condos give investors an opportunity to own a smaller asset with strong upside in a recovering real estate market. Office condos can range from $200,000 to upwards of $4 million in gateway markets like New York. Even at the high end, that is still considerably lower than the typical commercial asset and often lower than residential assets. Pre-leased office condos like One Flagler offer the benefit of immediate income from current tenants and a long-term return on the investment as the office market continues to rise.
Some office condos limit allowable uses. Most office condos, for example, don’t allow for medical uses or other uses that generate high foot traffic. This may not be an issue for many office condo buyers, but it’s a consideration worth noting.
A healthy office market is key. The state of the office market and location of a property are two key components to a strategic office condo investment. Miami’s office vacancy is steadily declining and there is continued tenant interest in the urban core. According to the Miami Downtown Development Authority (DDA), 750,000 square feet of office space has been absorbed into Miami’s urban core since the recession.
The Miami-Dade County office market ended the first quarter of 2015 with a vacancy rate of 11.6 percent, according to CoStar’s First Quarter 2015 Miami-Dade County Office Market report. Meanwhile, the overall vacancy rate in Miami’s Central Business District at the end of the quarter decreased to 16.5 percent, compared to 17.8 percent in the fourth quarter of 2013.
According to the DDA’s latest report, this positive trend should continue, buoyed by residential growth in the area. With few office buildings in the development pipeline, office demand is likely to outpace supply in Miami. Of course, location is an essential factor for any real estate endeavor. Downtown Miami is witnessing a resurgence in market activity, with major projects such as All Aboard Florida, Miami Worldcenter and Brickell City Centre underway. These large-scale developments will make the urban core even more desirable for prospective tenants and positively impact property values.
Office condos appeal to international buyers even more than domestic buyers. While internationally it is common in foreign nations for multiple buyers to own a building, this trend is not yet widespread in the U.S. commercial property market. However, foreign buyers are aware of its potential success. Argentina’s Coto supermarket family, for example, invested in 19 office condos on Brickell Avenue in May 2014. Miami will continue to attract buyers from across the globe who focus largely on pre-construction luxury condos as sound investments; however, as the market continues maturing, more investors will set their sights on office condos — a model they are comfortable with in their countries of origin.
Miami’s real estate market is undoubtedly at a critical point. As buyers in both the United States and abroad consider what type of property they would like to own, they should keep in mind the many potential benefits of office condos, especially in the urban core. In a growing and dynamic market, office condos are an affordable investment option for those looking for immediate income-generating opportunities.
Fabio Faerman is commercial division director at Fortune International Realty.