Buying a small office building - opinions??

Question

Hi! We have an opportunity to buy a small office building in an upper class town and neighborhood in Connecticut.

Building is 10,000 sq ft and is about 17 units right now. that is made up of:

1 apartment

16 offices

All updated utilities and mechanicals

Fairly large piece of land - 2 buildable lots on it

First floor: occupied by one long standing tenant

Second floor: remainder of offices - about 5 vacancies - is basically a co-working space

Beautiful/highly desirable location

Negotiated price is good. Will be a seller financed deal. Numbers pencil out well and based on the cap rate for the area, filling those vacancies should drive the value much higher with no work other than just bringing in new tenants.

Question is, does anyone have experience with small office buildings? Obviously, views on working in a dedicated office have somewhat shifted. Our opinion is that large office spaces may be going in the wrong direction, but small offices like this still have their place for people that do not want to work at home or cannot work at home. Thoughts?

Thank you!

Ryan Deasy · Answer

@Scott Mac thank you very much for this. a few of these things i have not thought of. we are entering the due diligence phase and will definitely bring up these items. just curious, do you have any office spaces? part of what we are trying to figure out is what is typical as far as including utilities or not in our leases. right now, everything is leased with owner paid utilities. if we can avoid this we would like to. or, maybe we just bill back the tenants at a rate that is subject to their occupied square footage? thanks.

Scott Mac · Answer

Hi Ryan,

Just off the top of my head, here are some of my thoughts.

Look carefully at the zoning and see if there are other possible uses allowed for it's zoning type (and see if the zoning conforms currently).

Such as Med/Dental (prob require an elevator), or whatever besides just office space (is the living space unit non-conforming--is it Grandfathered in, what triggers the end of the Grandfather, has that happened, will a sale make that happen (???), will pulling a building permit make it happen, is it just an illegal unit (???)

Also look at any restrictions on sq foot of buildings to square foot of dirt--meaning the vacant seems buildable dirt might not be as buildable as you think (sometimes upscale areas are larger lots than other areas by zoning law).

Also look at easements (especially on the vacant land) and factor in parking driveways, will the city let you curb cut for additional access if needed or are you stick with what you have.

Also look at the number of parking spaces needed for new builds vs what you have (will a new build trigger anything there), and consider if enough electrical is available at the site for new buildings.

Is there a Town Approval Board or some other such PITA process you must go through to get building/remodeling permits, and how much control do they have over your actions (plus how long do they take to approve, and is it "The Old Boy Network" to get approved (???).

Will pulling any permits on the existing building call for substantial (expensive) modernization upgrades to Handicapped Access, electrical, plumbing, new laws regarding signage, (FIRE SYSTEMS), etc...(???)

Good Luck!

Joel Owens · Answer

I usually offer a custom website for the buildings I buy with directory of tenants on there and try to help their visibility and business traffic to their own sites.

Little things that do not cost much in the overall picture can help foster goodwill with business tenants and they like to stay when they feel landlord keeps up the place and cares.

Ryan Deasy · Answer

@Joel Owens thanks for your response. luckily, there is not elevator. just stairs. i suppose you are right about the micro offices and there being more turnover. we will see what we can do to create more stickiness!

Joel Owens · Answer

Office sometimes can be a crossover and re-adapted in retail.

As mentioned check if just stairs or an elevator. If elevator you need to check service records. Replacing one can be over six figures and repairs can be mid 5 figures typically.

If just stairs see where they are located and how easy to access the second floor. Additionally have the second story flows from hallways for tenant access ingress and egress. Do NOT base rents off the first floor because typically those are higher per ft then the second floor.

300 to 600 sq ft you are talking more MICRO offices. As far as how long to rent up you need to drive the local area and look at vacancy with buildings and centers versus access and location quality and compare to yours. I am not big on regular office as there is no STICKINESS as a I call it with a tenant. Those tenants can often move in the middle of the night in a span of a few hours and be gone whereas as doctor office with heavy build out or a retail tenant with lots of installed fixtures takes much more work to leave. It's still possible they vacate but reduces the odds over regular office.

You also need to compare in place rent versus what market rent you are targeting.

There is more work in regular office and it's not for me. Lot's of small business owners for micro space but they often go out of business so you have constant churning of the space versus maybe a larger more stable business tenant for long term lease and constant cash flow.

No legal advice given.

Scott Mac · Answer

No office space, but I do have a background that includes commercial--the fundamentals will be the same.

Ronald Rohde · Answer

Nothing is really complex about it, it just takes time, energy, focus. You won't be doing thing 20 hours a week every week. But it will ebb and flow, responsiveness is certainly important (both for tenants and damage to building).

Ryan Deasy · Answer

@Ronald Rohde thank you. I suppose you’re right about management. This also has me thinking about how hard it would be to self manage. I suppose it would be somewhat easier as you are not managing anyone’s living spaces. Seems to be a greater sense of urgency for repairs when that is the case. Thank you.

Ryan Deasy · Answer

@Greg V. Thanks a lot for your response. Sorry I’m just seeing it now. Interesting to hear how long leasing a space could take. I would agree (with my limited knowledge) that the smaller offices would be quicker to fill. The vacancies there now are all small offices that are about 300-600 sq ft.

Ronald Rohde · Answer

You'll almost certainly have to self manage. Very few companies will take on such a small building with low lease velocity.

Other than, if the numbers work for a long lease up, do it. Great learning experience!

Buying a small office building - opinions??

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