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Office condos gain in popularity

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While residential condo conversions are commonplace in the real estate market, office condo conversions are steadily becoming just as well-known.

The reason?

Office condos offer business owners, especially small business owners, numerous financial benefits, such as tax deductions for mortgage interest, property taxes and depreciation, said Doug Ceresia, CCIM, vice president with NAI San Diego, a full-service brokerage company specializing in office and industrial sales and leasing, investments and facilities acquisition services, as well as property management.

The Garnet Pacific Plaza in Pacific Beach is currently undergoing reconstruction to turn the 19,177-square-foot, three-story building into office condos. Reconstruction on the building began in February and is expected to reach completion this month.

Owners of office condos also gain financial stability by knowing what their monthly occupancy costs will be in advance, while those who lease most likely will deal with annual increases in rental rates, he said.

Office condos are not new to the San Diego real estate market, but recently have begun to gain steam due to the many advantages they offer.

Additionally, many San Diego office buildings have traded at high prices over the last couple of years and tenants foresee increases in lease rates to cover higher mortgage costs.

"Office condos are a relatively new-again concept," Ceresia said. "They were first seen in San Diego in the 1980s and then stopped. Now they have come back and are going to be a growing property class in our market for years to come."

Other areas throughout the country, especially Phoenix, Ariz., have already taken advantage of the benefits of office condos.

"Phoenix sold 1 million square feet in office condos last year," Ceresia said.

According to CoStar Group, the number one provider of information services to commercial real estate industry, nearly 52 percent of buildings under construction in the Phoenix office market are office condos.

CoStar reports that in San Diego, there are currently 46 office condo buildings in the region, resulting in only 901,995 square feet of space, which accounts for 1.3 percent of the total market. Over the past 12 months, 18 office condo units have been sold in San Diego for a total of $12,333,042.

In Pacific Beach, the Garnet Pacific Plaza, located at 1940 Garnet Ave., is currently undergoing reconstruction to turn the 19,177-square-foot, three-story building into office condos.

Reconstruction on the building began in February and is expected to reach completion this month, Ceresia said.

"This is the first newly renovated office property in Pacific Beach in some time," Ceresia said. "There isn't anything available like it."

The 22-year-old building is undergoing extensive renovations, including a new roof, bathrooms, elevator, cooling tower, windows and a common conference room on the third floor.

The property can house 21 office units, ranging in size from 580 square feet to 6,602 square feet.

"Occupancy costs are the second largest expense to an employer after employee wages," Ceresia said. "If an employer can control the second largest cost in their business, it is a significant advantage for them."

For the 1,427-square-foot space at Garnet Pacific Plaza, the total effective monthly cost for an owner would be $1,790, compared with $2,152 a month for a lease, based upon market rates, Ceresia said.

Small businesses are the most likely users of office condos, with most office condos sized somewhere below 2,500 square feet.

"The concept of an office condo is very attractive for small businesses," Ceresia said, adding that businesses from all industries can be a great fit for an office condo, especially small businesses whose space requirements are unlikely to change within the next five years.

"If you are going to do a five-year lease, why not just own your own space for those five years instead?" Ceresia asks.

Small business owners also can get a helping hand from lenders who are willing to finance office condo purchases, he said.

"There is so much money available for small business owners to own their own space," Ceresia said. "These lenders have been quite aggressive in offering attractive packages."

Jay Suntrup at GE Commercial Finance reports that his organization is seeing financing applications for both office and industrial condos.

"Very few for-sale commercial properties are not office or industrial condos right now," said Suntrup. "These types of condos have definitely risen in popularity, and there is a lot of product in development."

Kovach is an account coordinator at Whitelaw Marketing.

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