Office Condo Market Cooling Off

Summary: The recent office condo market is expected to cool down after a couple years of torrid activity, mainly due to rising interest rates.

First off, here's an article published recently at www.realtor.org:

"A poll of more than 100 office appraisers, developers, and brokers found that 54 percent believe office condominiums are a trend that will come to an end once interest rates go up.
The poll was conducted by Grubb & Ellis and PNC Real Estate Finance. The typical scenario finds businesses buying the condos so they no longer have to pay rent, giving them greater control over space and occupancy costs. More and more office condos have been purchased as investments lately. Phoenix is one of the largest markets in this niche, with 189 office-condo properties in place and more than 100 others in various stages of development. However, other markets, such as Houston, with only three office-condo properties, barely register, even though that Texas city's office sector is three times the size as Phoenix's. "
Source: Wall Street Journal (12/14/05); Corkery, Michael; Forsyth, Jennifer S.; Haughney, Christine

Of particular note is in those office condos that are purchased as investments. Several real estate investors, myself included, have invested in these types of properties, only to find few if any potential tenants for the vacant space. In a market with the vacancy rate hovering between 15 & 20 %, I felt it was prudent to get out quickly. I'm very glad I did.

It's not the quality of the space that is the issue, but the fact that any tenant that is a good candidate for this space will very often simply purchase their own office condo. Many of the prospects for open the office condo space are startups or small businesses that can only commit to a one- or two-year lease. These businesses will either make it and buy their own office condo or fold up shop and move back to the spare bedroom home office from where they came leaving the investor to try to find another tenant.

Make no mistake, these are great properties, well built, with excellent finishes, that are outstanding values for the owner / user. As an investor, I would look to other areas, specifically industrial or warehouse properties, to spend my funds.

Good luck to you,

Marty Olson
Fox Real Estate Group
mo@foxreg.com
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www.mnspaceforlease.com
www.officespacemn.com
www.warehousespacemn.com

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