Pros and Cons of Investing in Commercial Office Space Buildings

Commercial Office Space Buildings are at the more expensive end of the investment market. These are normally multi-storey office blocks and their prices can range anywhere from $2 million to $100 million. Very often they are termed as “Trophy Investments” because of their voluminous size, their visibility and the huge prestige involved in their ownership.

You have to have deep pockets to invest in these commercial buildings. In the late 80s there were major problems with these 'Trophy Investments' as they became mill stones around the investors necks as the markets bottomed out. 

As most of the commercial buildings have of multi-tenancy the risks to an investor is reduced. However managing large number of tenants can pose a bit of a problem.

In case you do not have money to buy a stand alone commercial building you can invest in office strata's if the building is unit titled. The rate of return on these office strata's is much higher when compared to returns from owning the whole building. It is also easier to lease strata floors.

The problem with office strata's is that you do not have total control over your investment and you have to deal with body corporate politics. Additionally in case of a vacancy you have to pay the body corporate charges on top of the mortgage payments.

Office Space Investments: The Positives  

Listed here are some of the important benefits of investing in Office buildings:

 • Office investments generally offer higher Return-On-Investment when compared to other commercial property investments such as retail and industrial.

• You can buy commercial buildings well below their replacement value. This is because these investment buildings are sold on capitalization rates of their rent. The cost of land and construction goes up much faster than rise in rents. It is very common to buy commercial buildings at less than half their replacement value.

• You can greatly increase the value by filling up vacancies or renegotiating the leases.

• If you manage the commercial building then you can pay yourself out of the operating expense budget (OPEX) for your managerial time. This can become a second source of income for you and increase the return on investment.  

Office Space Investments: The Negatives

Listed below are some of the problems that you may face whilst investing in the office space: 

• Office building have numerous services such as fire systems, alarm systems, air conditioning and lifts that are expensive to maintain. The maintenance costs for these come out of the operating expense budget paid by the tenants. It is a good practice to sign up maintenance contracts with professional agencies to maintain these services to a high quality.

• Commercial Office investments is more susceptible to organizations down sizing due to change in market conditions or relocating to cheaper premises out of the central district.

• The demand for office space has been decreasing steadily with more people choosing to work out of home offices. This trend has caused downward pressure on rents.

• The decor of commercial buildings tend to become obsolete with time and needs to be renovated in order to keep up with the market value. In such an event you will need to invest money out of pocket for renovating the office property. You can avoid this by creating a sinking fund for carrying out major renovations. The payments to the sinking fund can be made from the OPEX payable by the tenants.

• Landlords are required to assist in the new fitouts or give extended rent free holidays to attract new tenants when vacancies occur.

You should not get dissuaded from investing in commercial office investments because of the few negatives discussed above. I have seen investors make a killing by buying run down empty buildings at throw away prices. Then by renovating and aggressively leasing the office space they create a huge value addition and add millions of dollars in equity to their investment.

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