Developers find office condominium market is strong in North Carolina
While most office construction is frozen waiting for an economic recovery, one sector of office development has seen little slowdown.
Developers who build office condominiums, aimed at small companies that want to own their space within a building, say that they are benefiting from the same low mortgage rates that have fueled home buying throughout last year's national recession.
Demand from small businesses looking to take advantage of rates and become their own landlord has helped developers to start new projects throughout the Triangle.
In Durham, at Farrington Road and N.C. 54, a partnership has started construction on three buildings totaling 53,000 square feet and hopes to start a fourth this year. On Roxboro Road, near Durham Regional Medical Center, developers break ground this week on a five-building office condo project aimed at doctor groups. And in Raleigh on Six Forks Road, Oakmark Development has almost finished selling a 48,000-square-foot office condominium project in eight buildings.
'The demand is stronger right now than it would be because of the interest rates,' said Chris Howlett of Durham-based Deacon Properties, who is developing Carolina Pointe at N.C. 54 and Farrington Road with Empire Associates and Williams Construction, both of Chapel Hill.
The project sold a 15,500-square-foot building to a cosmetic surgeon, and space in two other buildings to an interior designer, a lawyer, a bank and a restaurant. Though business sagged after the Sept. 11 terrorist attacks, Howlett said lower interest rates kept driving buyers to his property.
'You're talking about professional people that are going to buy their own space; that's a half-million (dollar) investment,' Howlett said. 'When you change the interest rates, that has a big impact on the bottom line.'
No one tracks the vacancy rate at office condominium buildings, but developers estimate that it is several percentage points below the for-lease market vacancy of 12 percent, as reported by Karnes Research Co., which tracks real estate in the Triangle.
'In the latter half of last year, companies really started looking to buy,' said Ed Hoel, president of Triangle Commercial in Cary, which is marketing space at six office condo projects, including the project on Roxboro Road. 'People see this as a good time to buy.'
Because they appeal to smaller businesses, the office condo market didn't suffer as much as the rest of the office market last year. The Triangle's largest office projects are trying to lease space, not sell it. Public real-estate companies such as Highwoods Properties and Duke Realty make money for investors by developing and managing offices for years and making regular rent increases. That business has been in a slump since last year.
Developers for most office condo projects will lease space, but the goal is to sell the offices. Most projects don't start construction without at least one confirmed buyer for space, and most office condominium buildings are quite small compared with for-lease offices.
Office condos can be single-story buildings of less than 10,000 square feet to about 30,000 square feet. New condos generally cost between $100 and $ 175 per square foot. Businesses then pay a monthly fee to the condo association to handle building maintenance. Business that lease office space in the Triangle generally pay between $ 15 per square foot and $22 per square foot annually.
Many of the Triangle's office parks are built between Raleigh and Durham, far from homes, but office condo developers try to build on main roads near residential areas where prospective buyers will see them.
Also, small business owners are more likely to stick close to home.
'The offices go close to homes because the (buyers) want to get out of commuting,' said Bob Fry, of Oakmark Development, which is building Capital Office Center on Six Forks Road in Raleigh.
Still, demand for office condo space can suffer from the same cycles that hurt larger office developers.
Bob Fry, of Oakmark Development, said that when he started building Capital Office Center on Six Forks Road in Raleigh two years ago mortgage rates were above 8 percent and many small businesses found renting cheaper than owning.
Now, with interest rates at their lowest levels in decades, Fry said condominium developers are in a better position than they were when the rest of the office market was booming.
'It's one of those windows that opens up for a short time and you've got to jump through it,' Fry said.