Offices for sale rather than lease are rare in the city, but commercial brokers say they are fielding more calls from small business owners about purchasing their workspace.
Their thinking might go something like this: Everyone they know has seen the value of their home skyrocket by tens of thousands or even hundreds of thousands of dollars, so why not own one’s office space and reap the same benefits? Commercial leasing brokers say buying offices can have benefits, but there are also potential drawbacks.
The major drawback, say brokers, is that a business can’t expand or contract easily in space that it owns outright. Brokers say that purchasing office space on the ninth floor of a building locks a business in. When someone else buys on the eighth and 10th floors and that business needs to expand, there’s a real problem.
While ownership sounds appealing to some, market observers are quick to point out there’s limited inventory, with most individual Manhattan offices to be found in Midtown, Downtown in Soho, Harlem, and in the Flatiron district. There are even fewer in the outer boroughs.
Where there’s demand, though, brokers can find some supply. Two brokers are selling office space in a new 20-story glass and concrete tower set to rise on West 25th Street in Manhattan. The building, called Chelsea Arts Tower, will house art galleries on its bottom eight floors and office tenants on its upper floors.
“We came up with the concept because we’ve been active in the neighborhood for a long time, and five times a week, we got calls from people asking, ‘can I buy office space?'” says Stuart Siegel of Grubb & Ellis, who brokered the land deal and is marketing the building along with colleague Alan Weisman. “With the hot real estate market, the calls have increased exponentially.”
The rare commercial condo project is being targeting to companies that expect to stay the same size in the long term, Siegel says. “A company that has a fairly stable number of employees and sales volume is a good candidate.”
Floor sizes in the building range from 3,100 to 4,700 square feet, with asking prices from $700 to $1,000 a square foot, or anywhere from $2.2 to $4.7 million. The annual costs connected with buying in Chelsea Arts Tower (including mortgage payments, taxes and common area charges) will likely be somewhat higher than renting in the area, but not by a huge amount. Average annual rents are $35 to $40 per square foot in that part of Chelsea, while costs would be around $45 to $55 a square foot for purchasing, Siegel says. Siegel says nonprofit foundations have expressed interest in buying, in addition to film production, fashion, and media companies.
“Nonprofit foundations are some of the best candidates for this kind of space,” he says, adding that nonprofits don’t have to pay real estate taxes.
Other pros of buying office space include fixed costs through the ability to lock in a given mortgage rate compared to the unpredictability of rent increases, and tax deductions in the form of mortgage interest and property taxes. There is also the possibility of renting out extra office space, and, of course, the prospect of property appreciation. But there are still the upfront costs of buying versus renting, which means less working capital to operate one’s business.
Despite concern about buying at the market’s height, Siegel says most buyers looking at Chelsea Arts Tower are taking the long view.
“They are looking at a 20-year horizon,” he says. “They realize that [West Chelsea] is still in its infancy.”