Rocky rental market driving more businesses to buy

Real Estate Weekly, May 25, 2005 by Elaine Misonzhnik

With the interest rates at a 40-year low, some businesses are starting to consider buying their offices instead of leasing them.

According to several brokers, commercial condominiums are gaining in popularity and new developments are popping up in trendy neighborhoods around the city.

According to Roxanne Betesh, a broker with Sinvin Realty whose company has closed at least five condominium sales since the beginning of the year, small and medium-sized firms feel that property purchases are a good investment.

"These companies are taking advantage of the fact that interest rates are very low--they are securing money, they see it as something much more [productive] for their company," Betesh said. "There is, I think, a very strong market of people who want to buy their own space. A lot of people in the residential market are buying for investment, and a lot of people in business are doing it."

"When a company has reached a size where they are comfortable with their business model and they don't plan on moving, ownership becomes preferable to leasing," said Jonata Dayan, of Winoker Realty.

Dayan, who has closed several condominium sales in the past few months, including a 33,000 s/f transaction at 12 W. 32nd St. and a 46,000 s/f one at 146 W. 29th St., thinks the wild fluctuations in the commercial rental market may be responsible for the condominiums' increasing popularity.

"It's hard to say why something happens, but it probably has to do with just the fluctuations of rents being so radical," she said. "Right now, rents are low, but they are starting to climb again. In the last couple of years, the space that was $40 per s/f went to $20 per s/f and is now $30 per s/f. So, I think it's just the insecurity of their position in the building--is the building going to be sold, are the rents going up? [With a condominium], they know what they've gotten themselves into, this is their place for the foreseeable amount of time."

To deal with increased demand, Winoker Realty has opened up a new commercial co-op and condo division, of which Dayan is in charge. The firm says that, in the past two years, demand for commercial office space purchases increased by 30%.

Not everyone, however, thinks that buying coops and condominiums is such a hot trend. James De Luca, senior director with Cushman & Wakefield, handles condominium sales from time to time, but he says he hasn't noticed an upsurge in the recent past.

"Most of the time, the entities that find it very attractive to purchase commercial condos are nonprofit groups," he explained. "This way, they become tax-exempt and that's a real benefit for them because they are saving more than $8 per s/f per year. There are several commercial condominium buildings [in the city] like 633 Third Ave. and 3 Dag Hammarskjold Plaza."

But private entities that might have any plans for expansion tend to shy away from commercial purchases because they are too permanent.

"You are locking a company in; it doesn't give it the flexibility to grow or expand or contract," De Luca said. "Companies feel grid-locked into their space, so I don't see a big trend of corporate America buying commercial office space."

Other problems De Luca notes are a lack of funds to buy a co-op or a condominium and the limited supply of properties for sale in New York.

"There are very few buildings in the city that are commercial condos. I just sold a building on 59th Street and a lot of non-profit companies looked at it, but none of them would step up to the plate," he said. "They couldn't raise the money to purchase."

According to Dayan, commercial co-operatives might be a little more affordable because their closing costs are lower, but tenants are more wary because they tend to associate them with a common problem of residential co-ops--impossible boards.

"A lot of people have had previous ownership experience with residential property and feel more comfortable with a commercial condominium. It's easier to re-sell, " she explained. "But after looking around, they'll find that commercial co-ops are less restrictive than residential. Most of the time, what they are looking for is finances and a legal use. The boards are not as quirky as in residential co-ops. And commercial co-ops are normally one tenant per floor, so you are dealing with 12 owners as opposed to 120 owners."

Still, if commercial condominium developments are hard to rind in Manhattan, commercial co-ops are almost impossible to come by.

"I don't know one commercial co-op in New York, except for the Time Warner Center at Columbus Circle, which is a very unique property," said De Luca.