Office condos are the next big thing, brokers say

By: CHRIS BAGLEY - Staff Writer | Saturday, July 30, 2005 9:37 PM PDT ∞

John Pozza has built a reputation and a certain degree of notoriety as a defense attorney. Fresh out of law school, he was trying run-of-the mill cases. But a dozen years of experience raised his profile, and in 2002, a former client catapulted him onto cable-news talk shows. Complex cases and higher fees have followed, Pozza says.

But Pozza and his staff of two have stayed in tight quarters. They're now in a neat warren of offices in a building on Jefferson Avenue in Temecula. He rents about 1,100 square feet for $1,500 a month.

Two years ago, Pozza began looking around. He had enough savings to comfortably make a down payment on a small office building, but there just wasn't anything to buy.

The chance came earlier this year. Developers began a three-story office building in Murrieta and said they would sell off most of the 18 suites to small businesses. Pozza jumped. He plans to close on a 1,300-square-foot suite Wednesday.

"I see this as a really good opportunity," he said. "You're not building any equity leasing."

In Southwest County's development gusher, office condominiums such as Pozza's are the latest wave. The new crop of office suites comes several years after home construction began to boom, but for many of the same reasons, real-estate professionals say. An office condo is similar to a residential condo in that a buyer owns only her individual office, but not the outside of the building or common areas such as hallways and surrounding land.

Three economic trends are responsible for the condo boomlet, according to brokers, developers and bankers. Interest rates on business loans have remained low, encouraging businesses to borrow money. Population growth in Southwest County means more customers for lawyers and other business people, who see a brighter, more secure future in the area.

And office rents in the area have been rising quickly, which makes many business owners think twice before renewing a lease. Marty Smith, a developer, said a typical monthly office rent has risen from $1.55 a square foot in May 2004 to $1.95 a square foot these days. Jim Nadal said the landlords he represents are getting 15 to 20 cents a square foot more than they got a year ago.

Construction costs have continued to rise. And though land in Southwest County is relatively cheap, a rush of buyers is starting to bid up the price toward the levels of Orange County and other coastal markets, developers say. Those trends have pushed more developers to build small offices that can be sold to small businesses, instead of large buildings for lease, Smith said.

"This is kind of like the last frontier out here," Smith said. "There's so much business coming in. (Cities) are doing everything they can to keep up with the demand for permits."

At least three large projects with a total of 130,000 square feet are opening up to buyers before the end of the year.

Summit at Silverhawk, where Pozza has bought, is the first. A divorce attorney began moving into a neighboring suite last week. The 45,000-square-foot building, atop a hill just south of French Valley Airport, overlooks the Temecula Valley.

Smith is developing Temecula Office Centre in Rancho California Business Park. Last week, tractors and backhoes ground across the sprawling dirt lot and a crew of 40 picked their way around three-foot ditches. They were preparing to lay pipe and pour foundations for 14 buildings. Twenty suites, ranging in size from 1,600 to 4,100 square feet, are scheduled to open in November.

Murrieta Springs Professional Center, north of the interchange of Los Alamos Road and I-215, is under construction and scheduled for completion in October.

The three developments will have a total of 58 office suites. They'll add about 7 percent to the roughly 2 million square feet of office space now in the area, real estate professionals say. Several more projects are now being planned, including three in the business park.

In a region awash with new shopping centers and tract homes, the numbers alone aren't all that remarkable. But the three projects are the first in Southwest County to sell individual office suites to the small businesses that will occupy them, real-estate professionals say.

"There hasn't been anything," said Keren Calder, a broker with Almar Real Estate Group.

Smith said Summit at Silverhawk was the only benchmark for setting his own sale prices. Calder, the sales agent for Smith's project, said the absence of other free-standing small office buildings has made it difficult to get the suites appraised.

The rise of office condos follows a pattern that has already played out in San Diego, North San Diego County, Orange County and Rancho Cucamonga, said Jordan Blanchard, who runs a division for small-businesses lending at Community National Bank.

Young families use low mortgage rates to buy houses that are larger or less expensive than homes in the urban areas where they work. Developers plan shopping centers and offices once they believe the customer base is large enough. They lease the large stores and office buildings to large businesses. Then the office condos come in.

Many business owners have wanted condos for a couple of years, said Jim Nadal, who is handling sales for Murrieta Springs Professional Center and Summit at Silverhawk. Nadal, a broker for Westmar Commercial in Temecula, said the market is ripe for condo developers who seek to fill an aching need.

"It's more difficult to lease up a building than to sell individual condominiums in the building," Nadal said. "There's a relatively small number of condominiums out there for sale, and a lot of demand from businesses who want to get in, so it's a safer investment."

Nadal and other brokers point to pre-sell figures to support their point. Calder said two of the 20 suites she's selling are in escrow even before their foundations are poured. Nadal said buyers will close on eight of the 18 units in Summit at Silverhawk by the end of August.

Buyers see it as an investment, too. An entrepreneur won't put down the money unless she has built up a business already and plans to stay put for a few years, said Blanchard, the small-business banker. If she thinks it might expand in that time, she buys a space bigger than she needs and leases out part of the suite to another business for the first few years. Both Pozza and the neighboring divorce attorney plan to lease extra space to other attorneys.

Nadal estimates that about 75 percent of the buyers use loan programs such as the one Blanchard administers at Community National Bank. The federal government's Small Business Administration guarantees a portion of loans to small businesses that will occupy more than half of the office. That lowers the risk for banks and encourages lenders like Blanchard to offer lower interest rates.

Federal tax rules also allow special write-offs for interest expense that don't apply to lease payments.

Pozza says his monthly mortgage payment on his new office is about the same as what he'd have to pay to lease. He just had to make the $37,000 down payment and bear the risk of ownership.

Among doctors, who need small specialized office spaces, condos are not entirely new. But the number of medical office condos being completed is startling, even to the real-estate brokers who are selling them. At the corner of Winchester Road and Nicholas Road in Temecula, 10 medical buildings are up for sale, some as small as 4,000 square feet. Two condo buildings are planned on Murrieta Hot Springs Road. In Lake Elsinore, a San Diego-based firm plans a building that will include 16 medical suites.

"It really is huge," Calder said. "We're just on the tip of it."

Contact staff writer Chris Bagley at (951) 676-4315, Ext. 2615, or at cbagley@californian.com.

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