Apartment Buildings vs Office Buildings

[Henri Meli]

If you were able to raise some money (let's say around $2-$3 millions) and you were faced with the choice of either investing it into a small office building (roughly 25,000 sqft) or an apartment building (50 units). Both are rated B-class, have similar pro-forma NOIs. Both are located in the same city. The office building is 70% occupied, with one tenant occupying 1/4 of the space and paying about 30% below market leases. The Apartment Building is 90% occupied, but is older in age. 50% section 8 tenants. Not a lot of room for rent increases.

I know the answer would probably be "It depends". However, I would really like to hear from people who are familiar with both investment types, which one they would prefer (in general) and why.

My commercial broker has always made the argument that it is more difficult to evict from an apartment building than from an office building. Furthermore, businesses take better care of the property than individuals living in the house. I already own an office building (100% occupied) and I recently went through a lease extension with one of my tenants (inherited from the previous owner) and they wanted me to amend almost every line of the contract. They also wanted an exit clause on their own terms. Office building seem to stay empty for longer periods of time and sometimes, one needs to offer quite steep abatements to convince potential tenants to sign long term leases.

On the other hand, I feel that it is easier to fill an apartment building than an office building.. 

Thoughts?

[Blair Poelman]

2 completely different ballgames.
Personally I am leaning towards commercial right now, but that depends on local economy. In my experience, office property is generally better taken care of by tenants, and usually comes with substantially less drama and BS than apartments with 50% sec8 tenants. However tenancy is different and each has their own unique challenges.

If commercial tenancy dips you will have a bit more flexibility to modify how you use the building - like full service leases or collaborative work spaces, etc... apartments are apartments, unless you make a big capital improvement and convert to condos, or make some other big changes.

while both are great, if the numbers were equal I would lean towards the office.