Southeast Real Estate Business

September 30, 2005

Southeast Real Estate Business, August 2005, “Commercial Condos Augment Strong Northern Virginia Market” by Brian Benninghoff

….By the end of 2002, 700,000 square feet of commercial condo space had been delivered in the Dulles Corridor of Loudoun County alone. By mid-2005, nearly one million square feet of additional flex/office condo product was under construction in the corridor, and almost another million square feet of product is proposed. (full text below.)

Commercial condominiums – including warehouses, flex, and office – have become a successful niche in the Northern Virginia market where Buchanan Partners is most active; they also are taking hold in the remainder of the Washington, D.C. metropolitan area, where the Maryland suburbs are playing a catch-up game.

In the Dulles Corridor -- which includes eastern Loudoun County and western Fairfax county -- flex/warehouse condos have been popular, with approximately 700,000 SF delivered and sold between the fourth quarter of 2002 and the fourth quarter of 2004. For the year-to-date in 2005, there is approximately 1.1 million square feet of flex/warehouse condo product under construction or recently delivered. Plus another million squarfe feet of product is proposed for delivery into eh second half of 2006 into 2007.

In the same market, about 575,000 SF of office condominium space was delivered between 2002 and 2004. There is an equal amount (approximately another 575,000 SF under construction as of fourth quarter 2005, and approximately 250,000-500,000 SF of product proposed for 2006-2007 delivery.

There are four factors contributing to the success of the commercial condominium niche:

Rapid housing growth in northern Virginia since the early 1990’s has created a need for the service businesses that typically occupy commercial condominiums. These services include HVAC, electrical, roofing, carpet, plumbing, and kitchen contractors and subcontractors. Office condominium buyers include medical practices, title companies, lawyers, financial planners, and civil engineers. These businesses typically follow residential growth. The nature of their operations -- slow and predicable growth, ownership by one individual or a small group of people, and the necessity to be located near the residents they serve -- make them ideal commercial condominium buyers.

Commercial condominiums allow small users to control their space. The typical flex/warehouse condominium is 3,000-4,000 SF; the average office condominium is 2,000 SF. Users of this size often feel poorly treated in larger, for-lease buildings. Acquiring their own space allows them to control their occupancy, at a relatively fixed cost, for an indefinite period of time. As long as the project is well-operated, condominium ownership gives the owner a standard of maintenance for internal and external common areas, along with some control over the use of those common areas such as parking and storage. Since commercial condominium units usually have separately metered utilities, most operating costs also are under the owner’s control.

Real estate is an attractive investment. Small business owners view commercial condominiums as a good long-term investment. Certainly the tax advantages of real estate are considered in the decision to buy. More importantly, however, commercial condominium buyers believe they are trading rent for forced savings. More than one small business owner has referred to his unit as “my retirement account.” The business may outgrow the space, the owner may retire, the business may be sold, but the commercial condominium is still an asset for the original purchaser. Low return in alternative investments, such as stocks and money market accounts, has contributed to increased investment in commercial condominiums.

The availability of capital makes acquisition of commercial condominiums relatively easy. The Small Business Administration and many banks offer attractive loan programs for owner-occupants, including reasonable down payments and long-term, fixed interest rates. Most of these programs have standard documentation and closing procedures, reducing the cost and complication involved with the condominium purchase. Without question, the current low interest rates have had a strong impact on both the price and absorption of commercial condominiums. At the same time, it does not appear that a modest increase in interest rates will choke off demand. If the decision to buy were merely a function of monthly occupancy costs, current buyers would be playing off lease opportunities against for-sale projects. Interest rates remain a factor in the purchase decision; however, until rates become prohibitive, other factors will continue to influence the decision to purchase a commercial condominium.

While the recent commercial condo boom has benefited both developers and owners, it’s clear that it cannot continue indefinitely, because there is a limited local pool of small-business condominium buyers. Residential growth in the Washington suburbs has caused growth and relocation of these types of businesses, resulting in pent-up demand for commercial condominiums. Absorption is likely to level off, however, as this pent-up demand is met.

Nonetheless, there will always be a role for commercial condominium product in the regional real estate market. Certain businesses will continue to prefer owning over leasing. As the region’s population continues to grow, these types of businesses will locate in and around new and growing communities, fulfilling local needs for a variety of services. For that reason, the commercial condominium phenomenon is definitely here to stay.