The Morning Report
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Friday, April 21, 2006 | There are a few more condos being built in Mission Valley. That wouldn’t be news. But these condos are not your average condos. For a start, they don’t have their own bathrooms. Or bedrooms. Or balconies.
The Hillside Professional Center on Camino Del Rio South are being gutted, refurbished and sold in pieces as office condos. These are essentially office suites that are sold individually to businesses or investors, rather than simply rented like typical office spaces.
It’s a concept that hasn’t been around for a while and went nowhere in the 1980s. But, on the back of a strong commercial real estate market, one company is hoping some small-business owners would prefer to buy, rather than rent, their office space.
Most companies don’t have the resources to own the 10,000 square foot office buildings that house so many businesses around town. Besides renting, there aren’t too many other options out there for small businesses. The attraction: Office condos allow small businesses to buy their own office with the possibility of building equity in the property.
The office condos being built in Mission Valley are the first of their kind to be developed in that neighborhood in a long time. Gary London, president of the London Group Realty Advisors in San Diego, said the office condo concept was first introduced in San Diego in the mid 1980s. The couple of projects that were built were not successful, London said, and the concept was largely abandoned by local developers.
As the market for commercial real estate has strengthened, however, some local companies have begun to revisit the concept and a few office condo buildings have been established around San Diego County.
Voit Development Company purchased the Hillside building in order to sell office condos. Vice President Jon Boland said the company aims to turn a B-minus building into an A-minus building. The company hopes to attract entrepreneurial small-business owners and medical businesses to the properties, which are selling for between $375 and $416 a square foot. Boland said he hopes buyers will be attracted by the tax advantages of owning rather than leasing an office, and by the promise of gaining equity if the commercial real estate market remains strong.
“I’m kind of surprised that the office condo market hasn’t blossomed earlier,” Boland said.
London’s not that surprised. He said that while there are distinct advantages to owning, rather than leasing an office – he should know, he owns an office that is a converted residential condo – there are also some distinct disadvantages.
“There’s a huge downside to office condos, and that is that it’s sort of anti-capitalist,” he said.
London explained that companies that buy office condos may find themselves squeezed for space as they expand. Such properties are perfect for some professions, such as doctors, whose businesses often stay the same size for their entire career, London said, but other ambitious start-ups and small businesses could soon outgrow a modest office condo.
Once outgrown, an office condo can prove difficult to offload, London cautioned. The re-sale market for such properties is not as large as, say, the market for residential condos because there are simply less buyers out there. Condo offices are a niche market, London said, so buyers with expansion plans are taking on a significant risk by buying rather than leasing their office space.
Nevertheless, London’s confident about the resurrection of the condo office concept.
“For the first time ever in my career, I believe that there’s an opportunity in this market,” he said.
Condos – the ones people live in – have seen extraordinary gains in value over the last few years, and though the residential condo market has noticeably slowed of late, San Diegans have been sent a clear message that there’s money to be made by owning property in the city. Alan Gin, a professor of economics at the University of San Diego’s Burnham-Moores Center for Real Estate, said some spill-over effect by investors from the residential real estate market, into what he said is a strong commercial market, is understandable.
“Even people in business would rather own, and given the high price of commercial space here, it makes sense that instead of buying the whole building, you just buy part of it,” Gin said.
If the Mission Valley properties turn out to be a viable investment, Boland said his company will be looking for more sites to develop. He said it’s also likely that other developers will jump on the bandwagon and convert commercial properties into office condos.
“There are a lot of companies that want to do this, we’re going to see more and more of it,” Boland said.