Commercial to Condo:
Investors Make a Move

Investors in office buildings, warehouses and shopping centers are increasingly adding a new word to their vocabularies: condominiumization.

The term literally means turning what normally is for-rent space into for-sale space. Such conversions have long been done in apartment buildings. But it has only been done on a limited basis with other property types, and mainly by developers who built projects that ended up not attracting many tenants. Now with the still-shaky economy, the practice has become more widespread.

Investors are buying multi-tenant commercial buildings that have had a difficult time getting leased up, and then turning the space into condominiums. They then sell these condos to small-business users such as dentists, doctors and lawyers.

Condominiumization can be a good thing for both sides. Investors who convert for-rental buildings into condos can benefit because they see a profit faster. "An investor who buys a building at $45 a square foot can sell space in it at $65 a square foot within eight months, so they make a profit quickly," says Manuel de Zarraga, an executive managing director in the Miami office of Holliday Fenoglio Fowler LP, a Houston-based real-estate investment banking firm.

Small-business owners can benefit because they purchase the exact amount of space they need, as opposed to having to buy a whole building and then bearing responsibility for other tenants. "It's ideal for the small-business owner that needs only 2,000 or 5,000 square feet," says Robert L. Riddle, president of Riddle Associates Inc., a brokerage firm in Chesapeake, Va. "It's good for small-business owners that would like to put money into bricks and mortar and wouldn't typically be able to afford a full acre of land and build a freestanding building."

But small-business owners end up taking on more risk in these transactions than sellers do, some brokers say. "Businesses fluctuate," says Greg Biggs, a senior vice president in the Dallas office of Studley, a New York-based commercial real-estate services firm. "A condo situation doesn't always provide flexibility for the user" when they need more space or less space for the business. And they have the added burden of finding a buyer.

Still, some investors see a huge market for condominiumization of office buildings, warehouses and shopping centers. One reason, brokers say, is that small-business owners continue to choose owning their commercial space rather than renting, primarily due to low interest rates that have made buying more affordable. (Small-business owners also are eligible for Small Business Administration loans that can further help them purchase property.)

One other reason is a lack of desire on the part of companies to lease space. While investors that buy these properties can divide the building and rent the space out to numerous smaller tenants, it's not the most attractive option.

"If you have a 200,000-square-foot warehouse and lease it to 20 small users, that's a high-risk investment," says James B. Sineath, president of Commercial Carolina, a Raleigh, N.C.-based affiliate of real-estate services firm Cushman & Wakefield Inc. of New York. "Small users move back and forth rapidly," he says, "making it hard to count on reliable income streams."

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