Office commercial properties (also known as office CREs) are used specifically for conducting business and workplace-related activities.
Some businesses that occupy office commercial real estate own the property they reside in, while others don’t. Businesses that don’t own their own buildings typically rent from an investor or landlord.
Office commercial leases tend to average 5 – 10 years. Factors like duration of stay, location, and size will impact the interest rate that lenders charge for commercial office buildings.
In this article, we’ll explore different types of office spaces, explain their investment upside, examine different financing options, and give an overview of some of the best places to purchase commercial office space.
Let’s dive in.
Types of Commercial Office Properties
In this article, we’ll look at 5 common types of commercial office properties: business parks, multitenant, medical, dental, and user-owner.
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Business Park
Business parks are areas of land, owned by real estate corporations, where many office buildings reside close to one another.
They’re usually developed in suburbs, and they typically offer cheaper lease agreements due to lower construction.
Business parks used to be a staple in commercial office real estate. However, in recent years the development of these properties has slowed for numerous reasons: increased options for builders, a decrease in companies requiring in-person office work, and a general aversion to “archaic” design.
That said, in recent years builders have designed more “modern” business parks to appeal to changing design sentiments.
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Multitenant Offices
Multitenant office properties offer multi-tenant leases, which let several different businesses occupy the same general space.
These leases often require that tenants take added responsibility or pay additional costs beyond just rent. For example, tenants might pay for select utilities or relevant costs to maintain the physical property. The property owner divides these costs among the tenants.
Multitenant office properties offer 2 main advantages for potential investors:
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Lease length
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Multitenant lease agreements average around 7-8 years. Tenants fill up vacant spots quickly, and more tenants mean more rent money for investors. Additionally, even if a tenant leaves, you’ll still generate rent money from other tenants, which mitigates your losses. It’s rare to ever have a fully vacant multi-tenant property.
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Efficiency
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Owning several properties in several different areas makes it harder to effectively manage your investments. The ability to manage tenants in the same space is a major upside of multitenant office properties—this also limits the number of transactional procedures and fees you might face.
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Medical Offices
Medical offices are commercial office properties designed to support health care practices and medical activities.
They’re physically designed to accommodate the needs of medical practices and to enhance the patient experience.
As a property owner or investor, keep in mind how the appearance of your property will affect tenant success. In other words, nobody wants to walk into a medical office that feels “overly clinical” or that isn’t well-designed.
Similarly, think about location.
The physical property should be easily accessible to major roadways and also provide plenty of parking. Always consider these factors before investing in a medical office building.
If you’re leasing out a medical office building, consider the other medical offices in your area.
While you want to avoid competition, remember that not all medical offices offer the same services.
It might be beneficial to lease near another medical office property if that property offers highly specialized service and if your tenants offer a complimentary service or can receive referrals from them.
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Dental Offices
Dental commercial office properties are similar to medical office properties, but they also have their differentiating factors.
Just like other medical office buildings, dental offices are designed around a specific medical practice—in this case, dentistry.
Given that purpose, they’ll usually have different rooms designed for multiple patients, certainly required utilities per room and specified rooms for certain dental service machines.
Leasing dental commercial properties aren’t the same as leasing other forms of office real estate.
Typically, dental offices are owned by dental professionals—they aren’t leased by a landlord.
Although this isn’t always the case, different factors—the hassle of moving equipment, advertising the move, or issues with the volume of business upon moving—make it difficult to find occupants for a vacant property.
We’ll discuss financing options later in this article.
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User-Owner Offices
User-owner offices are office properties where the occupant of the space also owns the space.
Technically the property owner must own at least 51% of the office space to be considered user-owner.
User-owner property owners tend to present more financing options than other office property types.
For example, the SBA 504 loan option gives some of the best financing options available for these properties.
Remember that many user-owner properties for sale might be vacant or soon-to-be vacant. It might be difficult to find and retain tenants for these properties. Do your research before purchasing these properties.
Why Invest in Office Commercial Property?
Commercial office properties present numerous advantages over residential properties.
Here are some reasons to invest in office commercial properties.
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Income
Commercial office properties present significantly higher average annual returns (6-12%) than residential properties (1-4%).
Additionally, while residential properties generate most of their value through appreciation, commercial office properties also generate value from tenant rent—this high-yield, a constant stream of income appeals to most investors.
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Lease control
Commercial office properties give property owners a high level of control.
Unlike residential properties, commercial office real estate isn’t subject to certain bylaws and regulations.
As a commercial property landlord, you’ll control everything from lease length to deciding which tenants pay for what utility. Increased control over your property means less trouble for you.
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Direct and Indirect Investment
Commercial office properties offer two main investment opportunities, both of which might be attractive, depending on your financial situation.
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Direct
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Direct investment—this is what most residential investors do—means owning and monitoring the property.
If you have a high net worth or can generate enough financing, this can be a great option.
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Indirect
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Indirect investment means investing in marketable securities. These securities then invest in commercial real estate stocks and/or businesses.
Instead of buying physical property, your money appreciates as the market rises.
Financing Options for Office Commercial Properties
If you lack the capital to invest in commercial office real estate, you’re not out of luck! There’s still plenty of financing options that can give you exposure to commercial office real estate.
Choose carefully based on availability and relevance to your situation.
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Commercial Real Estate Mortgage Loan
Commercial real estate mortgages loans are readily available for most borrowers. A lengthy amortization period also gives you plenty of time to pay back the loan.
Interest rates on commercial real estate mortgage loans will vary from bank to bank, depending on your credit history. A higher LTV ratio means your bank will pay more upfront, which keeps your capital free.
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Working Capital Loan
Working capital loans are short-term loans. They come with amortization periods that typically don’t exceed 5-10 years.
Working capital loans typically cover investments for businesses to help them grow and scale (purchasing equipment, etc.). Working capital loans can be a great option to finance the purchase of your office commercial property.
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Leasehold Improvement Loan
Leasehold loans are used to pay for renovations of commercial spaces.
More specifically, they provide the capital you need to improve a leased space, improve your owner-occupied building, or even construct a building from the ground-up.
Because these loans typically come with short amortization periods and low interest rates, they can be a great option for financing your commercial office property.
Where to Buy Office Commercial Properties
When it comes to purchasing office commercial properties, like any other real estate investment, it’s most important to consider location.
Location is the single most important factor to consider when you’re investing in office commercial property.
Additionally, identify which category your prospective property falls into:
- Class A buildings are the best when it comes to aesthetics, infrastructure, location, and age. You’ll pay a premium for these office buildings.
- Class B buildings are older and less competitive than Class A buildings. Price-wise, you won’t pay top dollar for this class of building. Many real estate investors target this class of building for restoration projects.
- Class C buildings are the oldest, cheapest type of office commercial property. Typically over 20 years old, they’re often located in poor neighborhoods with maintenance needs.
FAQs
How do I know if an office commercial building is in the right location?
You’ll want your property to be easily accessible for your tenant’s customers and clients, i.e near main roads. You should always do research about the area surrounding the commercial property you’re interested in. Location affects the price of the property, but it also affects rent on tenants. Do your research and talk to your broker if you need additional guidance.
Do I need a commercial real estate broker?
While it is possible to find the perfect property for yourself, on your own, CRE brokers are professionals who excel at understanding the market and available properties in a given area. They can worry about finding the property that suits your needs so you don’t have to.
What are common warning signs when it comes to office commercial properties?
One of the most common red flags when it comes to office commercial property is if the property has been on the market for a long time. If the property has been sitting vacant for months, there’s probably a good reason why potential investors aren’t biting.
Also, remember to research the developer of the property—the last thing you want is to purchase property from a developer who (you find out later) violates safety codes or cuts corners to finish projects on time. These will become your problems in the future if you choose to purchase properties without due diligence.
Hire a property inspector if you’re unsure about these factors!
Should I buy commercial office real estate or residential real estate?
Office CREs are a high risk/high reward investment. They offer higher yields than residential investments, but they also present the added worry of finding tenants. Essentially, you’re betting that your tenants will succeed, and that their business success will enable them to continue paying the rent.
With a proper understanding of the commercial real estate market, you can find the right property for your needs.
Conclusion
Commercial office properties can be a fantastic investment opportunity!
Conduct research on available properties based on your needs, and seek the guidance of brokers to help you find the property that’s perfect for your needs.
If you’re interested in investing in office commercial properties, Loanbase is the perfect solution for your financing needs.
We connect lenders and brokers via a seamless, easy-to-use online platform that takes the hassle out of commercial real estate transactions.
