The office condominium was a viable and attractive option for many businesses in the Atlanta market during the 1990’s and up to today. Office condominiums offer an attractive and affordable way to own office space, which is typically the 3rd highest expenditure for most businesses. Ownership consistently offers a long term cost savings for most every business when compared to leasing office space. But, the main determinant for most businesses in making this decision is typically weighing the capital investment necessary to acquire real estate and debt payments versus the annual cost of leasing office space.
A Delayed Recovery of Capital Investments
One characteristic of the recovery from the disaster of the Obama years was that while there were many small businesses who had maintained outstanding capital in reserve, a good number of those businesses did not deploy capital in the acquisition of real estate. There was a lack of confidence in the administration that led to hesitation on the part of many small business owners. The reasoning was that the climate in government did nothing to instill their confidence in the future. Fear of higher taxes, over regulation and anemic economic policy led many businesses to remain firmly on the sidelines and keep their capital in reserve for equipment, payroll and shortfalls due to the depressed economy. During that time, we observed asset values for office condominiums that declined to levels equal to as low as 60% of replacement cost. Many of the projects brought online before the crash were poorly conceived and executed and suffered as purchasers became more and more critical of project quality. These buyers of office condos, defined as small businesses needing 1,000 to 5,000 square feet, were reticent to acquire these assets, even at historic pricing lows. As a result, only a limited number of small businesses did execute and purchase low priced real estate, while a greater number waited to see how political and economic policy would develop. The result? A delayed recovery and absorption of office condominiums at a much slower rate than would have been present in an environment of supportive economic policy.
Another primary effect of the ‘Great Recession’ was the lack of new development of office properties and in particular, office condominiums. Development capital will not be attracted to projects unless there is ample margin, and support for profitability in those projects. With pricing for office condominiums at 60% of replacement cost, the potential for profit, and by extension, investment interest in development of new projects, totally disappeared. As a result, absorption for office condos occurred almost exclusively in existing projects.
Office Condominium Projections for the Future
So, where are we today? The existing inventory of office condominiums outside the Perimeter is more or less in balance. With no new projects and a slow climb out of the office condo basement, we are seeing values move north towards full replacement cost. This has led to good news for office condo owners, with values again approaching pricing at levels that is much closer to their acquisition price.
What will the future bring? We see these conclusions:
- No new office condo development…except: Until market pricing equals or exceeds 110% of current replacement cost, there will be no new office condo projects built in the markets we cover. Except…see #2.
- Medical condos are still viable. Medical office users are still active office condos and they will pay higher prices for well executed projects with good design an ample parking.
- Office condos are still a viable investment. Office condos are still a viable investment for many businesses. The payback of investment equity, i.e., down payment, for office condos, compared to the cost of leasing comparable office space, still is shorter than five years and in many cases, less. So, any business that has a future should consider acquiring an office condominium. Office condos are outstanding functional office environments, at a price that can outperform a typical leasing arrangement.
We sold over 175 office condos from 2010 through 2016. Buying or selling, you can rely on Piedmont to offer you insight, guidance and professional representation in your office needs.
Stay well and stay tuned…