Less than a decade ago, the commercial real estate market was bursting with activity from the emerging office condominium market. Now that the recession has set in, the future of those developments, in which the occupants own the space, is in question.
Numerous large-scale projects have stopped construction or stand finished and mostly vacant, while others face foreclosure. And with no real change on the horizon, brokers and developers are unsure what is to come of the Valley’s office condo market.
According to data from CoStar Group, there are 333 office condo projects in various stages of development across the Valley. With that much inventory, some experts say foreclosures involving entire projects are likely.
“From our standpoint, it is just starting,” said Andrew Cheney, principal of
Facing challenges
The second phase — a pair of two-story office buildings at 7689 and 7669 N. Pinnacle Peak Road — is in the foreclosure process, said Sean Spellman, an associate with
The project was forced into foreclosure after the Las Vegas-based developer stopped making loan payments about a year ago. Single-story units at the Peaks are being marketed for sale or lease, and the two-story units now are being offered only for lease, Spellman said.
Investment Equity’s 315,000-square-foot Zanjero Falls Corporate Oasis also is going through the foreclosure process. The project’s 150,000-square-foot Phase I was scheduled for a July 30 trustee deed sale, said Bret Isbell senior vice president of GPE Commercial Advisors LLC and the broker for the project.
Isbell, who specializes in trustee deed sales for office projects, said many Valley office condos will be going back to the bank.
“From research I’ve done, I’d say there are about three times as many trustee deed notices on office condos” in the second quarter of 2009 compared with second-quarter 2008, he said. Other projects are facing challenges as well, in the form of vacancies and construction delays.
“It’s just a nightmare,” Dragoo said. “The development was about 80 percent presold in escrow. We had hard earnest money from the buyers.”
Loss of funding is happening to others in the Valley, too, he said.
Although many developments are having trouble staying afloat in a down market, some Valley developers are treading water until the economy rebounds.
NO DEMAND?
Nearly 30 percent of office condo projects Valleywide are sitting empty, according to data from CoStar.
Jim Riggs, considered by many to be the pioneer of the office condo concept, has pulled out of that development segment. Riggs, CEO of Scottsdale-based
Saxa’s nearly 50,000-square-foot Red Mountain Office Suites in
Saxa’s 88,991-square-foot
Saxa also owns two floors totaling about 92,000 square feet at the Westgate City Center Office Lofts, 6770 N. Sunrise Blvd. in
Riggs said his company no longer is developing office condos in
‘A function of value’
Despite industry woes, some players are seeing positive signs.
Things have started picking up again for Gilbert-based
The company also increased the size of its
While that project is on track, Utaz has vacancies in other projects and is working to close deals by the end of the summer.
Willett said Utaz is seeing activity because of the “function of value” in the market right now. With prices dropping and interest rates low, he said potential buyers have come back into the market to get good deals. He said prices have stabilized in the past few months, making it an attractive buyer’s market.
“Today by far represents the best value we’ve seen in years,” Willett said. “The fact we’ve been doing more business in the last 60 days than we did in the last nine months means we have definitely turned a corner.”
According to Riggs, many projects have lost between 50 percent and 75 percent of their 2007 values.
Get Connected
Saxa Inc.: www.saxainc.com
Utaz Development Corp.: www.utaz.com
Grubb & Ellis/BRE Commercial: www.brecommercial.com
GPE Commercial Advisors LLC: www.gpe1.com/commercial_advisors
Lee & Associates: www.lee-associates.com
Investment Equity Development: www.investmentequity.com
Office Condos
What is an office condo? Office condominiums work much like their private housing counterparts. Instead of renting a suite of offices, a company purchases an individual unit in an office condo complex. The common areas are co-owned by all of the tenants, and a board usually oversees landscaping and other maintenance issues.
What are the advantages and disadvantages to owning an office condo? One plus is increased ownership rights, compared with renting or leasing equivalent space. Rental properties are always under the control of a landlord, which means monthly rent could be raised or the lease terminated with short notice to the tenant. By owning the space, companies in office condos can avoid such surprises. The mortgage payments should remain relatively stable over the life of the loan.
Who should consider buying an office condo? Office condos are ideal for professionals and companies that can safely predict their long-term needs. An architecture firm or small advertising agency might do well in an office condo, for example, but a fledgling manufacturer could find future expansion nearly impossible. There also could be restrictions on the type of business that may be conducted in office condos. The facilities may not be able to accommodate excessive customer parking, for example.
Reprinted with permission from wiseGEEK,
http://www.wisegeek.com/what-are-office-condominiums.htmPhoenix Business Journal - by Stephanie Riel Friday, July 31, 2009
