Office Condos Weather Credit Crunch

Though larger office investment has been profoundly affected by the credit crunch, the smaller office-condo subsector has not been hit as hard in certain U.S. markets.Ford Gibson, principal of Gibson Development Partners, has mainly seen big lenders pulling away from buyers in South Florida. “The buyers just went out and found another lender,” he said. “It seems like the big lenders have made a portfolio decision not to finance these properties.” Local banks swooped in quickly, however, noting that transactions did not lose much time.    As an office condo developer, Gibson is careful where he builds. “We did not go out an mass produce. The market did get a little inflated, but now it’s slowed down,” he said, noting that very few speculators are active; they and flippers accounted for much of South Florida’s office demand. But the market has had a few surprises. Gibson reported that another developer recently sold a whole floor of a building for $500 per square foot. Overall, if a developer has a well-positioned condo located where there is demand from higher-income tenants, such as accountants, law firms and architectural firms, he should do well.    In Phoenix, banks have been much more conservative with lending, especially those who once offered 100-percent financing, noted Colleen McPherson, vice president of office for CB Richard Ellis Inc.’s Phoenix office. But the biggest trend is all the second-hand space coming back onto the market—owners who were involved in the residential market, such as builders, mortgage companies and title companies, have been closing shop and looking to re-sell.    The problem, though, is that buyers do not want built-out space. “The buyers are being offered $300 per square foot, but they’re saying they’d rather let it go to the bank and then get it for $150 per square foot,” McPherson said. And some will go to the banks, which could spell trouble for owners who used 100 percent financing or guaranteed the transaction with their personal homes.    Overall, the sales market has been slow. McPherson pointed to the 13 percent office condo vacancy rate in Phoenix, although it has brought down some artificial price escalation. She explained that when the condos were built five to 10 years ago, they sold for $170 per square foot at shell completion, which shot up to between $250 and $300 per square foot before the credit crunch hit. The prices are down to a more normal $200 per square foot. In the meantime, buyers are standing back and waiting. McPherson contends that the market should change in a year and a half, noting that Phoenix’s growth will help it correct faster than other U.S. markets.But to finance office condo deals, credit is plentiful in Southern California and Texas, as banks shift away from residential lending and more toward commercial lending, noted Brian Burke, president of Burke Real Estate Co. The credit crunch has not impacted investment as much as supply and demand issues in Southern California, while in Texas, demand has been somewhat stronger due to its industry diversification. Overall, Burke said his company has seen demand go from a hyper pace to a more normal pace.