A lot of people are interested in buying or leasing office space, for a variety of reasons. Some want to establish some offices, others want to use it as an investment, while others want to become landlords. Whatever the reason may be that you want to buy or lease this type of space, you first have to gain a greater understanding of it.
Office space is a type of commercial real estate. There are numerous categories of this type of real estate, which go above and beyond warehouses, huge office buildings, or whole shopping centers. In fact, you have to be very precise in terms of a definition of the property type you are interested in. The office, for instance, is one such category.
Understanding Office Space for Sale or Lease
In terms of classification, an office space can be a Class A, Class B, or Class C property. These are relative classifications, however, and depend heavily on context. Technically, a Class A building is the best when it comes to location and construction. A Class B building is usually constructed to the highest possible standards, but its location may not be as desirable. The Class C property is everything that does not fall into Class A or Class B categories.
Next, you have to think about the CBD (Central Business District). If an office space is in the CBD, it means that it is in the heart of the city you are interested in. If you are looking at places such as New York City or Chicago, or even some slightly smaller cities like Jacksonville or Orlando, you would find that CBD buildings can also be downtown area high rise buildings.
This is in sharp contrast to suburban office buildings. This is a different type of classification that includes structures of between 80,000 and 400,000 square feet, usually up to mid rise, just outside of the main centers. There are often suburban office parks on the outskirts of larger cities.
Office Real Estate for Sale – Pros and Cons of Investing
Now that you know the types of office space, you have to start thinking about the investment itself. Commercial real estate is a highly recommended option for people with excess capital. It is classed as a sound investment. That said, investing in office space is not always the best option out there. You need to have an excellent understanding of the pros and cons of this type of investment.
Let’s look first at the pros:
- You can get higher rental amounts. An office space is generally in a central location. Furthermore, it is likely that enhanced services are offered with these types of properties. Generally speaking, a business tenant is able to pay more in monthly rent than a residential tenant. Hence, you make more money if you buy one.
- Property value can increase. The majority of people who invest in office real estate charge rent to cover the cost of property operations, meaning they earn little to nothing. But when, a decade later, they sell the property, they usually make millions of dollars.
- You can have longer lease terms. Most businesses who look for office space for lease want to do so for longer periods of time, rather than establishing themselves and having to move again. As such, it is common to be able to put down a lease for five years or more, giving you a steady stream of income for that duration.
Now, for the drawbacks:
- You have to deal with tenant turnover, which is the biggest risk of all. Choosing to invest in a residential property means that your tenants will eat and sleep in that home and if they leave, the new tenant will want to do the same. But with an office space, you might need to handle extensive refurbishments each time you get a new tenant. For instance, if your first tenant looking at office space for rent was a chiropractic office, and your second one is an insurance agent, you will have to completely transform the space in order to keep it relevant for the current tenant.
- Zoning is a real issue for investors looking at an office building for sale. Usually, you will find that the land on which a commercial site is place is zoned for specific uses, such as retail or manufacturing. If you then want to use it for something else, you will need to request a zoning variance. This is difficult, not to mention costly, and you have no guarantee that you will be able to get that zoning variance request approved.
- You have to deal with property taxes. The value of properties is increasing, and so are the taxes that you have to pay with that. Most office space owners cope with this by increasing their rent, but they can only do so much before a tenant decides to go elsewhere. Hence, you need to make sure that you anticipate increased taxes and how you will pay for that. If you want to invest in office space, you will need professional help at every stage of the process. Speak to tax experts who are aware of the laws in your local areas, and who know how to limit your tax exposure.
Office Space for Lease – Is It Preferable to Buying?
Real estate markets, like the economy as a whole, go through peaks and dips. The result of this, however, is that office space in particular is always interesting for large scale investors (who have the financial capabilities of keeping a property during a dip), but a real difficulty for small to medium sized enterprises. They continuously have to wonder whether they should rent, or whether they should lease.
Purchasing an office space is a very complex financial transaction. Even seasoned experts have to make sure their timing is perfect if they want to get a return on investment. Furthermore, these investments are incredibly risky, because the difference in value between spikes and dips can run into the millions. That being said, there are some significant advantages to purchasing office space as well.
Buying an office space to operate out of gives you full control over your overhead costs in relation to real estate. If you lease, by contrast, you will be reliant on the market – for better or worse – and this can lead to higher rental costs. Furthermore, if you do time it right, you could earn a significant income from it through asset appreciation, property depreciation for taxes, and more.
It should be noted, however, that the question “should I lease or should I buy office space” cannot be answered for everybody. Rather, each individual business has to think about what will and will not work for them. Hopefully, the guide below will be of help to you.
Once you decide to buy office space, you have to be very much aware of the risks that you are facing. You don’t want to invest in a property, only to find out to your surprise after two years that renting would have been a better financial decision. Some of the specific risks that you will face include:
- Choosing the wrong location, because what’s hot and what’s not tend to change very rapidly. The reality is that trendy places are only trendy for a short period of time. Gentrification may be strong today, but might stall tomorrow. Of course, it can also go the other way.
- You could lose your liquidity if you spend too much on your office space. Selling real estate is difficult, particularly with commercial spaces. That said, you do have strong assets on paper.
- Your cash flow will become more tenuous. You may, for instance, have a tenant that doesn’t pay rent, or you may have unexpected repairs to pay for. You never know when you will suddenly start to earn less, and the difference can actually be huge.
Becoming aware of these risks is about doing your homework. Hence, before you sign anything, you need to undertake significant due diligence. Be hands on, making sure that you perform on site visits regularly and that you are there at each point of the operation. This will give you a better opportunity to identify any problems that are present.
Ultimately, it is all down to economics. You can do a rent v. own analysis, which should be done by a real estate expert. This will look at the real estate market trends and compare those to your business’ growth forecast. This is very beneficial, as it allows you to look at different possible scenarios and will give you an idea of whether or not you could cope with those and, if so, how. Additionally, speaking to an expert means that you will have a better idea of the pros and cons of both leasing and buying.
Office Space for Rent or Sale – You Will Need Some Expert Help
If you are a small business owner, it is unlikely that you also have extensive commercial real estate knowledge. Hence, you have to get the right people around you. Experts can tell you whether the time is right for selling or buying, which locations are good right now, and how you can close the deal. Some of the experts you need to have on your team include:
- An accountant to help you calculate how much you can afford, and what the benefits or drawbacks of a purchase will be in terms of your operating budget and taxes.
- A lawyer to make sure the transaction is completed legally. This professional can also negotiate for you with both the seller and your chosen lender.
- A commercial broker, who can help you find properties that are within your budget range.
- A mortgage broker, who will discuss the various financing options with you, including U.S. Small Business Administration guaranteed loans, the CDC (Certified Development Company)’s 504 Program, and more.
Now that you have your team, it is time to find your property. There are numerous things that you have to think about when it comes to picking your office space. “Location, location, location” is very important in all forms of real estate. Some of the things you should take into consideration include:
- The location, which is the biggest issue of all. You have to make sure that your suppliers, vendors, workers, and customers are all able to get to you in a convenient way. In fact, you need to be somewhere where customers actually come to you, which may be within easy access of shipping lanes, highways, or railways.
- The physical condition of the building, which means you need to know what the property was used for before, how much wear and tear has happened, whether there are potential liability or environmental issues (lead paint or asbestos for instance), and so on.
- How the office space for rent or sale can be used. For instance, if you are a manufacturer, you will need to be in an industrial zone, whereas an accountancy can be placed in a commercial zone. If your zoning is different from what you plan to use the office space for, you will have to request a variation, which can be costly and is not always successful.
- Limitations on the interior and exterior of the property. Zoning laws, covenants, and building codes can all limit how much you can change a property. For instance, if you have found an office space in a historic building, you may not be allowed to change the facade.
- Access and parking facilities. Your customers have to be able to reach you and you also have to make sure that the location and its access is fully compliant with the Americans With Disabilities Act and other such laws and regulations.
- Whether you can expand or lease the building. If you are an entrepreneur, it is likely that you believe that you will experience significant growth, which means you will need to be able to expand your operations as well. If this growth doesn’t happen, however, you may want to lease out the additional space that you have.
Unfortunately, you are still not done yet. Let’s presume that you have found the property you want. You will have to go into contract, which means that you will start for a certain period of time, usually one or two months, in which you have to do a lot of homework. Revisit what your objectives are and ask yourself whether the property you have picked will help you to advance on your objectives.
Office Building for Sale or Rend – Steps to Take in Finding the Right One
Now you are at that point in time where you will need to rely even more on your advisors. You should be able to find a broker who can bring the necessary third parties in, including environmental analysts, appraisers, engineers, and more. They will verify the current condition of the property, how it was used, and whether there are any liabilities in structural soundness, electrical wiring, and more. You have to be involved in this yourself as well. Do also check out what the surrounding office spaces are being used for, so that you can be sure that they won’t have any negative impact on you, or the value of your property. Do also make sure that you speak to a title company to find out that there aren’t any outstanding insurance claims or litigation issues against the property.
If you do find any problems, you will have the opportunity to negotiate a new deal with the seller if you are buying or landlord if your are leasing. Alternatively, you may simply have to walk away. Assuming that there was no need for this, however, and that you have agreed on a price, you need to get financing in place. You must think about how much cash you want to pay yourself, and how much you need to borrow.
If the economy is strong, then there are lots of financing options out there for small to medium sized enterprises. When the global economy went into meltdown in 2008, credit was tightened by banks and most of these options became highly limited. If the economy is tough, it can be very difficult to get a loan. Because of this and the fact that the economy is tough, you need to have enough money available in case something goes wrong. Your credit rating should be good, and you need to be profitable.
This is where your accountant and your attorney will be your best friends. They can ensure that the contract has the necessary components and that the terms are advantageous to you and your needs. All contingencies have to be expected and covered, in an unambiguous, clear manner. You must check every detail, from zoning laws to air rights, from tax requirements and existing tenant leases. Then and only then should you feel comfortable with actually signing on the dotted line.
You also need to make sure that your business plan is updated. As soon as you have made the purchase or lease, you have to implement and execute your new business plan immediately. Time is money, after all, and this is particularly true if you were to build or renovate an office space.
Do make sure that you will get long term advantages out of buying or renting an office space. Think carefully about what the next year or two are likely to hold, and then decide whether you should buy or whether you should lease. And always be realistic about this, rather than looking with rose tinted glasses.