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Amid Low Interest Rates, Office Condos Multiply

September 24, 2003

by: Sheila Muto

Even as office-rental rates in New York continue to fall, Robert Tan concluded it made more sense for his architecture firm to own its office space rather than lease it.But with just six employees — including Mr. Tan and his partner and wife, Judith Gerrard — the firm wasn’t in a position to buy a building. After nearly two years on the prowl for space, Gerrard + Tan Architects plunked down $540,000 to purchase a 1,200-square-foot office suite on the second floor of 145 Hudson St., a building in TriBeCa that is being converted into one floor of retail condominiums, three floors of office condominiums and nine floors of residential condominiums from its previous existence as a 175,000-square-foot office building with ground-floor retail space that was available for lease.”I don’t have to worry about my landlord increasing my rent now or being thrown into the marketplace after the lease is up,” says Mr. Tan, whose firm moved into its new home last month from space it was subleasing in a building a few miles away. What’s more, by purchasing the space, he adds, “our monthly outlay, which includes the mortgage payment and maintenance and real-estate taxes, is about the same as if we leased the space,” which would have cost $3,500 to $4,000 a month.With interest rates near historic lows, many small businesses like Mr. Tan’s, as well as nonprofit groups, are looking to buy their own space to build equity and avoid rent increases and other demands from landlords. By owning the space that they occupy, nonprofits can also launch fundraising campaigns to help pay for the space, which they can’t do when they lease space, and most are exempted from paying local real-estate taxes, which can cost $10 to $15 a square foot in New York. Landlords and developers appear to be slowly taking notice. Facing sluggish leasing activity coupled with growing interest from office tenants, some landlords and developers are converting their for-lease office properties all or in part to office condos or opting to build office condos in lieu of for-lease office space in new projects.While average office-rental rates in Manhattan have fallen about 30% during the last three years, prices for office condos have increased 50% during the same period, says Bruce Sinder, president of Sinvin Realty Corp., a New York real-estate brokerage firm that is marketing the retail and office condos at 145 Hudson St. As prices of commercial condos have increased, many owners and developers are adding plans to create office condos in addition to converting old office buildings into residential condos, he adds. “That allows developers to maximize the value of the residential space by selling the less desirable space [on the lower levels of the building] to office tenants, which usually requires less renovation work for developers than residential conversion.”In the four months since the office condos at 145 Hudson St. were put on the market, more than one-fourth of the 43,800 square feet of the space has been sold or is under contract for sale. The residential condos — except for the two penthouse units, which have temporarily been taken off the market — are sold out.On the opposite coast in Pasadena, Calif., about 12 miles northeast of downtown Los Angeles, Champion Development Group broke ground last year on a $40 million, four-story building, which was planned to have ground-floor retail space and office space on the remaining floors. But due to weak office demand in the area and interest from prospective buyers for both residential and office condos, Robert Champion, the development firm’s president, decided during the construction process to transform the top two floors of the 75,000-square-foot building into 38 for-sale residential lofts and divide the second floor of the building into as many as eight for-sale offices. The ground floor of the development remains as retail space for lease.So far, nearly one-third of the 18,000 square feet of office-condominium space has sold or has been spoken for at the development, which is expected to be complete next month. The residential units will go up for sale next month, but Champion Development has a list of about 200 people interested in purchasing a loft. A. Harrison Barnes, chief executive of BCG Attorney Search Inc., purchased a 3,500-square-foot office for about $1 million that will serve as the new headquarters for his recruiting firm, which is currently based in Los Angeles. He also plans to buy one of the large lofts for about $600,000, which he says will save the three-year-old firm on the cost of putting up recruiters and job candidates in hotels. Mr. Barnes says he is interested in purchasing an office condo in New York as well.Jonathan Serko, an executive director at New York-based real-estate services firm Cushman & Wakefield Inc., says that the office-condo market is relatively small. Given that, a secondary benefit for office-condo owners is that “over time, there is appreciation in these assets,” he says. Mr. Serko is representing Mount Sinai Medical Center in its effort to sell its nearly 83,000-square-foot office condo in Manhattan. Mount Sinai paid about $105 per square foot in 1997 for the space, according to news reports at the time. Mr. Serko expects the property will fetch about $400 per square foot. Although the architect, Mr. Tan, hasn’t really given much thought to how much the office condo might appreciate in value, he believes it will prove to be a good real-estate investment. “Even after 10 years, if we sold the space for the same amount of money we paid for it, we would still be ahead,” he says. — Ms. Muto is a national real-estate writer for The Wall Street Journal. Her “Bricks & Mortar” column appears each Wednesday exclusively on RealEstateJournal. She is based in the Journal’s San Francisco bureau.