While office vacancy rates continue to rise in the Washington area, the popularity of town house-style office condomimiums has been steadily growing, especially in the suburbs, some local builders and developers have reported.
"There is a growing market that's very interested in the ownership of their office space," said Greg Fazakerley, president of Development Resources Inc., adding that the trend is largely due to "users looking for more for their money."
Condominium office buildings and town houses are "a natural outgrowth of the smaller tenants chosing to own their own space" in order to control their office expenses and to take advantage of the appreciation of the property, he said.
Although some commercial real estate observers believe that office space for rent here is actually a healthy sign of increased office construction that offers more choices to tenants, others view the excess space as a "glut" that has frightened some developers away from the leasing market at a time when the depressed economy has prompted many users to reassess their space-leasing commitments and expenditures.
Office vacancy rose nationally to 5.4 percent this March from 3.8 percent a year earlier, according to statistics compiled by Coldwell Banker. In Washington, vacancies rose to 2.8 percent from 0.1 percent in the same period, the Los Angeles-based brokerage firm reported.
National average rental rates for existing buildings rose more than $4 per square foot during 1981, an increase of about 26 percent, said officials of the Office Network Inc., a corporate affiliation of commercial real estate firms in major U.S. markets. In Washington's central business district, rates rose to about $25 per square foot, ONI said in its current report. In addition, most new long-term leases included provisions for rate escalation, the Houston-based group reported.
Although condomimium ownership may result in operating expenses about 20 percent more per square foot than costs for equivalent leased space, an owner reaps the benefits of cost stabilization and increased equity, Fazakerley said. While both condominium office buildings and town-house-style structures can provide those financial benefits, the town house office offers the smaller firm "a better designed space" that is more suitable to its needs, he said.
His firm recently sold the last of nine town houses at Alexandria's Dalton Wharf Office Center, where the buildings range in size from 1,800 to 11,000 square feet. In addition to the town houses clustered around a brick courtyard, Dalton Wharf also includes a five-story, free-standing office building. Fazakerley said the 80,000 square feet "sold much more rapidly than we had anticipated," noting that the complex sold out in less than a year.
He said the firm is also developing two other town house projects in Alexandria--Duke Street Metro Center and King Street West, both currently under construction. One of the 13-units at King Street was sold to a trade association before building began, he said. The firm also developed and completed sales recently at Alexandria's Lee Street Square, a 40,000-square-foot town house office cluster.
The increased development of town house offices in Alexandria "fits into the image of the city, especially in the Old Town area," said Engin Artemel, the city's planning director. He said zoning concessions have been made to some builders who agreed to build town-house-style office structures as buffer zones between residential and commercial areas.
The reason town house offices appeal to builders and developers is "simple economics," Artemel said. While large office buildings may take years to develop, "the build-out period is much shorter" for town houses, he said, noting that sales are easier and permit a developer to "get in and out" quickly.
Small professional groups and trade associations like having their own address, something they can't get in large buildings, he added.
While town house office clusters are not new to Northern Virginia, "there aren't many developers doing office condominiums" in the Maryland suburbs, said Mark Leader, project manager for Georgetowne Park, a 60-unit town house complex being built in Bethesda by DANAC Real Estate Investment Corp. and Crowell and Baker Construction Co.
He said builders and developers in Northern Virginia started the trend in the 1970s, and his firm "followed suit" to take advantage of the "untapped market" in Montgomery County. The profit motive also played a large part in the firm's action, he said, noting that a town house office sells for significantly more than a town house home, although the construction costs are comparable.
"There's a relatively large profit spread," as well as a "quick turn-around" for DANAC, he said, adding that the buyer gets the advantages of tax depreciation and resale value.
The impact of the deepening recession is reflected in the way buyers approach commercial acquisitions, Leader said, noting that the hurdles of large down payments and high interest rates are as troublesome to the small business man as they are to home buyers. "The key for us in all this--as it is in the residential business--is financing," he said, adding that his firm has become "flexible" on arranging financing for prospective purchasers.
He said DANAC plans to build two more condominium clusters, one 60-unit project in Gaithersburg and one with 30 units in White Oak.
"If you believe there has been some overbuilding, it seems you'd have to offer commercial space users something with a unique appeal, like a condominium," said builder Thomas P. Harkins, president of Thomas P. Harkins Inc. While his firm has not built any town-house-style condominium offices, he said "that market may be stronger than most" because ever-rising real estate values are becoming increasingly attractive to firms now leasing space.
"In this economy, builders and developers are leaning toward the concept of condomimium offices," said Stephen Goldstein, a vice president of the Julien J. Studley Inc. commercial realty firm. While some developers are renovating town houses in Washington for sale to office buyers, condominium town house-style offices are not being built in the District's downtown area, and won't have an impact there because land is scarce and prices are high, Goldstein said. "The nature of the land in the area is such that town houses are not profitable," he said.
Town house condominium offices are now concentrated in "over-built or less-than-prime locations" in the suburbs where some developers think they are good buys and attractive to buyers, Goldstein said. Nevertheless, "with all the uncertainties in the market and interest rates as high as they are, not many people are being convinced of that," he said, noting that, sales have not been very strong.
Whether the condominium town house office succeeds in the marketplace "remains to be seen," he said.