COVER STORY, APRIL 2005

A PERFECT FIT
Office condominiums are a popular alternative for small business owners and developers.
Lara Fuller

Alliance Equities will begin construction this summer on Lake Forest Tower, which is located off Bradley Road along Interstate 94 in Green Oaks, Illinois.

Office condominiums have become a popular choice for many companies, particularly smaller firms. Condominium buildings give smaller businesses the opportunity to own their own space, often in areas that they wouldn’t be able to afford otherwise. In addition, in a soft leasing market, condominiums also offer an alternative for both developers and businesses. The for-lease office market in Chicago has struggled during the past several years, and many developers are looking for an alternate way to bring in business. Office condominium development, whether new construction or conversions of existing buildings, has begun to take off in Chicago, benefiting both developers and small businesses alike.

Chicago, like many cities across the United States, has experienced a lagging office market. Chicago’s downtown office market has seen high vacancy rates, low tenant demand and declining rental rates. Even with an improving economy overall, the for-rent office market has yet to catch up. Instead of letting unused space sit vacant, developers have begun to look at other options. “We looked at the high vacancy rate in downtown Chicago and asked how we could differentiate the space in a difficult market,” says Bert Scherb, partner with Chicago-based Ameritus. “Our solution was to offer the space for sale.”

Ameritus is putting its solution to the test with the development of 211 W. Wacker. The 158,759-square-foot project is located in Chicago’s central business district, known as “The Loop.” The building sits directly across from the Chicago River.

Ameritus’ development is a conversion of an existing rental office building first constructed in 1929. The 18-story building will feature units ranging in size from 2,200 square feet to 25,000 square feet. “The small floor plate is easily adaptable to the smaller users who represent the largest share of tenants in the market for space today,” says Scherb.

However, the biggest draw of 211 W. Wacker is its location. “The most important feature of this building is its location on Wacker Drive, an office corridor well known for its institutional-grade real estate,” Scherb says. “The large office buildings on Wacker Drive historically have been owned by large institutions with deep pockets. With the conversion of 211 W. Wacker to office condominiums, even small businesses now have the opportunity to own property on Wacker Drive.”

The fact that office condominiums offer small businesses the chance to own space in a high-end area previously available only to large corporations, is a major appeal. Everyone from lawyers, architects, accountants, insurance brokers, doctors and dentists are drawn to the new projects. In addition, a company’s ability to own its own space and pay a mortgage as opposed to rent, is a very attractive proposition for many groups, including non-profits. “This is good for smaller, privately-held companies, trade organizations, labor unions and charities that can take advantage of tax-exempt status,” says Mike Van Zandt, senior vice president with Oakbrook Terrace, Ill.-based NAI Hiffman. When a non-profit, or similar group, owns its own space, it is exempt from paying property taxes. Most companies would rather put their money toward something tangible — building equity — rather than just giving it away to a landlord.

Like Ameritus, Vernon Hills, Illinois-based Alliance Equities plans to take advantage of the largely untapped, for-sale market. This summer, the company will begin construction on Lake Forest Tower, which is located off Bradley Road along Interstate 94, just north of the Lake Forest Oasis in Green Oaks, Illinois. “We saw an unmet need in the market for smaller businesses and professionals to be able to own their own real estate in a quality Class A building,” say Ben Reinberg, president, and Alan Shaw, principal with Alliance Equities. “In addition, the financial advantages are immense — the cost is projected to be the equivalent of well under $15 gross, including taxes, CAM and build-out over a 10-year period.” The $16 million, Class A office condominium building will feature 95,781 square feet of office space, a heated underground parking garage for 70 vehicles, high-speed Internet access and high-speed traction elevators. Loebl Schlossman & Hackl is the project architect, and KCC is the general contractor. Construction is expected to be completed by spring 2006.

While these new projects offer many advantages to smaller businesses and boutique firms, there are a couple of issues that are a consideration for some companies. As a business expands, space can become a problem. “Growth is always an issue,” Van Zandt says. “If an owner’s next door neighbor doesn’t want to sell, an expanding company may be forced to move to accommodate its own growth.” In purchasing an office condominium, companies need to be careful to look beyond their present needs and consider where the company is headed in the future. In addition, the resale of office condominiums can become a problem, especially if the previous owner made major changes and alterations to the space. Finding another business with the same space requirements can also be a concern.

Despite the drawbacks, condominiums offer businesses something that was previously unobtainable for many — quality office space in a desirable market. During the next several years, the office condominium trend is expected to continue as more and more developers jump on the bandwagon. “Especially with interest rates remaining at a 40-year low, people want to own their own real estate and build equity,” say Reinberg and Shaw. Offered the choice between renting space and the opportunity to own space, many businesses are choosing the latter. With a ready and willing market, developers will continue to turn from for-lease properties toward for-sale condominiums. “During the next two years, more condominiums will be built and these buildings will be larger than the ones already in existence,” Van Zandt says.

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