With real estate prices at an all-time high in Manhattan, city occupants are looking to a different type of asset class: office condominiums. As demand continues to rise for these petite office locales, the price is on its way upward as well, with the average price per square foot at $862, which is up 50% compared to the previous half year.
But what is an office condo exactly? According to Time Equities, one of the premier developers of office condos in New York City, an office condo is a portion of an office building that can be purchased, rather than leased, from the owner/developer of the office building. The owner of the office condominium unit holds title to the premises and has full control over any and all design elements within the premises. Office condos may be as small as a single office suite among many suites on a floor of an office building, or it could consist of an entire floor of an office building, or even several combined floors.
With rising rents, increased demand and higher prices for office condominium units, sales and pricing are reaching record levels. Michael Rudder, Principal, Rudder Property Group, who specializes in the sale of office condominiums, said “due to the imbalance of tremendous demand from office condominium purchasers and severe lack of available office condominium units, pricing has soared. In the first half of 2015, in Manhattan, there were a total of 252,017 square feet of office condominium sales in different buildings, averaging 6,462 square feet per sale, with a total sales volume of $217,248,738. There were a total of 39 office condominium units sold. The average price per square foot of $862 was up over 50% compared to the previous half year. Pricing was $290 per square foot higher than the five year average of $574 per square foot.”
In addition to appreciation in value, owning an office condominium allows tenants the ability to lock in their occupancy cost and insulate themselves from the ever-rising expense of office leasing in Manhattan. The benefits from an investment perspective include the ability to write-off depreciation and interest expense, and as I stated earlier, profit from the long-term capital appreciation of such a valuable asset.
Over the past few years, many non-profits have been able to sell commercial real estate for significant profit, allowing them to re-invest in an office condominium, fund endowments or provide ongoing capital for their operations.
In addition, non-profits and foreign nationals can benefit from property tax exemptions for local real estate taxes.
With very few buildings being converted into the office condo structure, demand is currently outpacing the inventory. The Rudder Property Office Condominium Report for the first half of 2015 reported that there are only 93 office condominium buildings in Manhattan, totaling 10.5 million square feet.
The shortage is also impacted by the low inventory of buildings converting from rental to condominium. Earlier this year, the largest new conversion office condominium units was offered to the public at the 40-year-old, 417,000 square foot office tower of 866 United Nations Plaza, a six-story glass building on 48th Street across from the United Nations. Industry leaders as well as the sponsors expect the condos to be sold to foreign nationals due to the building’s convenience to the United Nations.
It’s clear that condominium units are fetching significantly higher prices than just a few years ago, but the question is: How long will this trend last? For health care professionals, boutique firms and other companies that do not demand a very large work space, it’s certainly an interesting option to have on the table. Only time can tell if the trend will continue to move upward - or if there is another trend around the corner to take its place.