Office space is a popular commercial real estate investment. From downtown office towers to one-business workplaces, from five-year leases to month-to-month opportunities for startups, there’s a ton of variety in this sector.
But that certainly doesn’t mean buying office space is easy. Potential investors need a thorough understanding of the costs associated with buying, renovating, and managing a commercial office space, from construction costs to liability insurance. They also need a nuanced understanding of the market’s geography and competitive landscape, so they can identify the right niche and attract tenants who will stay for the long term.
Owning a business adds an additional layer of complexity. If you plan to operate your company out of the building you own, looking for space becomes much more personal — and it can be challenging to balance the need for space that fosters the corporate culture you want and the need for a building that generates revenue from other leases.
On the positive side, owning a business adds an exciting layer of opportunity. Buying office space for your company is a great way to start investing in real estate. Because your company will be working out of your new space, you won’t have to consider the time and costs associated with finding qualified tenants, leasing and marketing. In many ways, buying office space for your company is similar to buying a home.
Orange County’s unique market conditions also create an opportunity for smaller businesses to purchase office space. Unlike Los Angeles, San Francisco, or even San Diego, Orange County has a high proportion of properties where you can purchase less than 20,000 square feet. If you run a smaller company and you’re on the fence about buying office space, you may be in the best location to do so.
Before you begin buying office space, either as an individual or on behalf of your business, start by asking yourself these questions.
What Are The Costs Associated With Buying an Office Space?
Prudent investors know that forecasting starts with operating expenses, not revenues. Beyond the acquisition costs, office space requires renovation, furnishing, ongoing maintenance, insurance and more.
Office space owners also need to budget for the ongoing costs of maintenance and utility payments. You’ll need to obtain liability insurance to protect yourself or your business in case an accident occurs on the property. Relatedly, you may need a lawyer’s expertise.
If you own a business and plan to occupy the space, consider whether you’ll need to renovate it to suit your company’s needs. Construction costs frequently run over and timelines frequently run long — meaning you may not be able to begin collecting lease payments as soon as you’d hoped. Then you’ll need to market the property and, if you occupy the building, fill it with the furniture and supplies your company needs.
Understanding the office real estate market is essential to understanding your potential costs. Office space is generally divided into three classes. Class A properties are typically new builds or recently renovated ones, located in established and amenity-rich neighborhoods and offering amenities themselves. Class B properties are usually older office buildings that will require the new owner to make repairs and upgrades. They may be on the fringes of thriving neighborhoods or in transitional areas. Class C properties come with high vacancy rates, out-of-date amenities, and undesirable locations. These are risky investments that are typically seen as redevelopment opportunities.
Take time to project your costs in detail, focusing on the type of assets you plan to invest in. This will affect what kind of management you need to offer on-site. Class A buildings carry the expectation of attentive management that can provide on-site amenities and respond immediately to maintenance requests. You may need to consider hiring security personnel (or having your property management firm do so). Class C properties, on the other hand, may require very little attention most of the time.
These cost projections will help you set lease rates and forecast your potential profits. As you think about your potential profits, also think about the valuable time and money you’ll save by purchasing office space. If you’re buying an office just for your company, you won’t have to consider costs associated with marketing, vetting tenants, leasing and property management — all of which are time-intensive.
With cost projections in hand, forecast the revenues associated with your new office. If you plan to lease some or all of the building to tenants, your projections should incorporate local vacancy rates and any fees you plan to charge tenants. If your company will use the site, factor in the money you’ll no longer have to spend on rent.
Investors who make conservative projections are less likely to overextend their resources. Plan for costs that are significantly higher than you expect. If you’re renting part of the space to other tenants, expect spaces to be vacant twice as long as you’d like. If the numbers still pencil out, you may be ready to buy office space.
What Are Your Growth Plans for Your Company?
Before you make a decision, however, examine where this new property fits into your company’s day-to-day operations. How much could this property help your company grow? If your projections are accurate, which goals could you achieve with the revenue you generate? Focus on how commercial space could help you reach existing targets before you begin setting new ones — after all, you do not yet have concrete evidence of how well this investment will perform.
On the other hand, think about how equipped you and your company are to take on these additional liabilities. if the acquisition leaves you in the red, how will you cover those expenses? Will they put the business at risk?
If you’re running a fast-growing company, you might want to consider purchasing an office as a way to diversify your investments and start a real estate portfolio. If your company grows too large for the new space, you might consider purchasing more office space and leasing the one you’ve outgrown.
If you plan to run your business from this new space, think about your operations and your workflow. How would the space itself support your projected growth? Does the space align with your company’s brand you present to clients? Does it have the right amount of privacy and security, not only for today, but for what your company will look like in five years? If you see potential for fostering the culture you want to develop in this space, update your detailed estimate to include renovation and furnishing costs.
Throughout the process, remember that you’re searching for a commercial real estate investment, not your dream home. Prioritize the building’s financials and its location. Aesthetics can always be updated.
What Are Your Investment Plans for Your Company?
Commercial real estate, from an owner’s perspective, is an investment first and an office second. Even if the financials make short-term sense, it’s essential to review your long-term investment plan to make sure office space is a fit.
An investment plan is similar to a business plan in that it charts a course for how your investments will grow over the course of many years. If you don’t yet have an investment plan, start by assessing your company’s current financials: How much money do you have in your rainy-day fund, set aside for debt servicing, or pledged toward your long-term goals? How much cash do you have available to make new investments?
Next, think about your goals. If you need lots of liquidity — cash on hand for a nimble investment strategy or for emergencies — then commercial real estate may not be the right fit. Do you want a variety of income streams to insulate your company against up-and-down business cycles? Office space may fit more squarely into that vision.
Commercial real estate is not without risk. Some risks are outside an investor’s control: Economic volatility, inflation, and unemployment rates all affect real estate — and while it may be possible to predict these ups and downs, it’s difficult to tell how significantly they will affect any given market or property. Savvy investors resist the urge to react to every change and focus on broad trends over time.
Agents often say that all real estate is local, and for the most part, they’re right. If you want to make predictions about your potential success as a commercial property owner, focus on local and regional trends: Which neighborhoods are becoming more desirable and which are in decline? Is your market lacking in top-line, on-trend office space, or is that space already saturated? Finding a specific niche can help protect you, at least in the short term, from an overwhelming amount of local competition.
Orange County in particular is a great place to purchase office space for the first-time investor. The market has a higher proportion of office buildings smaller than 20,000 square feet, which means owning your space is more viable and attractive option smaller businesses here than in other large California cities.
It’s also important to pay attention to sectoral trends. Co-working space is on the rise. Corporate campuses are going out of style. At the same time, there’s a rising backlash against the open-concept offices that defined the last decade of Silicon Valley startups. Again, focus on what your market has and what it lacks, and choose an area of focus for your space.
If you buy multiple office buildings, you can diversify your assets within the office sector. Many CRE-focused investors hold a variety of properties: Cutting-edge office space in an up-and-coming neighborhood; traditional medical office space or legal office space on established streets; and reliable, if unexciting, Class B space.
The lowest-risk investments are triple net lease properties, in which tenants cover the costs of utilities and property tax. As long as the building is fully leased, the owner’s costs are minimal and management needs are very limited. Leases on triple net properties tend to be long, often three to five years — and stable long-term leases can be a selling point if you decide to liquidate the asset.
But as with most investment classes, the more risk you can tolerate, the greater your potential profits. For example, investing in renovations that appeal to innovative tenants will require more capital up front, but could result in greater revenue if you can raise rents.
What Do You Want From Your Future as a Commercial Property Owner?
As you consider whether to buy office space, consider whether this investment fits into your personal financial goals. Think about the long-term future. What do you need to prioritize today to live the way you want to live in retirement, or to pass a thriving business on to your heirs or shareholders?
From a personal financial planning perspective, commercial real estate can be a solid investment. It is generally quite stable, since costs and rent rates are both very predictable. Most spaces can be adapted over time to fit the needs of a changing market. If you plan to operate your business in that space, it
That doesn’t necessarily mean a total refresh every decade — office space can age gracefully and attract different types of tenants, if slightly reduced rent, as it does so.
Before you purchase an office building, it’s important to think about how you’ll eventually sell it or pass it on. Often, individual commercial real estate investors sell buildings as they age to free up money in retirement. Corporations can liquidate real estate assets when they need a cash infusion.
At the same time, it’s important to monitor the market and sell at the right time. You don’t want to end up with a building on a street full of abandoned storefronts. If the right offer presents itself — even if it’s a little earlier than you’d hoped — be prepared to consider it.
Are you ready to buy office space? If you have thoroughly considered the role of commercial real estate investing in your company’s growth and your personal or corporate investment plans, you’re well on your way. If you have made careful cost estimates and conservative revenue projections and the building still fits into your financials, you may be ready to start looking at properties.
That’s when it can be wise to seek expert guidance. At WindWater, we offer brokerage services and full-service marketing to commercial property owners. Our team can help you find the perfect property and develop a branding and marketing plan to help you secure the tenants you want. Reach out today for a new kind of real estate experience.