COVER STORY, NOVEMBER 2008

TAKING OWNERSHIP
Buying versus leasing office space: the perks of owning your own office.
Ashley Ball

From the suburbs of Kansas City to the heart of Chicago, office condos are filling a void for stable Midwest companies looking to give landlords the boot. While the office condo market is not immune to the challenges currently facing commercial real estate, its financially sound fan-base has enabled this sector to fare better than many of its counterparts.

One of the main reasons development firms such as Watkins & Company Inc. in Kansas City, Missouri, and the Chicago office of Cape Horn Group are continuing to invest in office condos is simply because the numbers add up.

“It actually costs less to own than to lease,” explains Juan DeAngulo, the regional manager of Cape Horn Group. “So, on top of the fact that you have all the different intangibles that go along with buying, there’s the very tangible fact that you’re making your money work for you and not your landlord.”

In the Northland submarket of Kansas City, Missouri, Rick Watkins and Greg Foote of Watkins & Company recognized not only the cost savings associated with office condos, but also a condo’s ability to more efficiently meet its user’s needs. When a client of Watkins & Company approached the firm in hopes of building a small office, Watkins and Foote noticed a lack of product availability in the area.

“We had a number of people approach us about finding them this 2,500-square-foot to 5,000-square-foot building, and those are a rarity,” says Foote, an associate at Watkins & Company. “Essentially, for people who want to own something of that size — unless they want to buy a large building and then try to lease out the rest — this is their only opportunity for ownership.”

Watkins & Co. has completed the first building within its Equity Plaza development in Kansas City.

As a response, Watkins & Company began planning Equity Plaza, a seven-building office condo project located along Interstate 29 in Kansas City. Upon completion of the approximately $25 million project, the seven single-story structures will total 140,000 square feet. Measuring approximately 20,000 square feet, the first building can be divided into condos as small as 1,750 square feet in size, allowing the developer to reach out to smaller companies looking to own property.

“They have been pretty well-received in the medical community,” says Watkins, founder and broker of Watkins & Company. “When doctors sell practices to a new doctor, the price is based on the book of business that they do as far as revenue plus assets; so when they own the real estate, it contributes to their net worth.”

Aside from providing customers with a wide range of space configurations and tangible benefits, the project’s green initiatives are generating buzz among prospective buyers. High insulation values can translate into lower utility costs for property owners. Additionally, the solid structure of the building ensures its durability, which means that owners will have a better chance of selling their space when they are ready. Nevertheless, even when dealing with office condo sales, it’s all about the location.

“One of the things that made us comfortable with going forward with the project is that there is a connector between Equity Plaza and a hospital that will be completed next year,” Watkins says. “So the project is less than 2 miles from the hospital, which is situated on a finite amount of ground, and many doctors like to be located close to the hospital.”

Cape Horn Group’s The LaSalle Wacker office building (left) is located in the heart of Chicago’s CBD.

Much like Watkins & Company, Cape Horn Group is promoting its prime locations to bolster sales at its two office buildings in downtown Chicago. Since acquiring 55 West Wacker and The LaSalle Wacker in 2006, Cape Horn Group has successfully converted them into individually owned offices. With 55 West Wacker expected to be about 50 percent sold by the end of the year and The LaSalle Wacker currently at about 18 percent, Cape Horn Group is making its mark in the relatively young Chicago office condo sector.

In lieu of the current economic conditions, one of Cape Horn Group’s advantages is the prestigious nature of its locations. Smaller entrepreneurial firms, which are the typical office condo owners, are more determined than ever to display their stability.

“They are putting a stake on the ground that says ‘this is where I am,’” DeAngulo explains. “It communicates a very strong message to its stakeholders, employees, customers and investors to be able to say that they own a piece of Wacker Drive.”

Although the fluctuating market has resulted in some hesitation to invest in Cape Horn Group’s properties, in some instances, the uncertainty has encouraged investment in their product. According to DeAngulo, a few customers are moving forward with contracts in order to get their money out of paper and into brick and mortar. People are looking for the kind of stability associated with owning commercial real estate.

“Banks right now are trying to avoid all the risk that they can, and if you have a law firm that has been paying rent for 10 years, why wouldn’t they pay for their mortgage,” DeAngulo explains. “Banks see these investors as a very attractive place to put their money.”

Despite the availability of funding, Cape Horn Group and Watkins & Company are struggling to overcome the deeper psychological factor at hand: man’s fear of the unknown. Office condos are a relatively new product in both the Kansas City and Chicago markets, which has led to some initial skepticism from traditionally conservative Midwesterners. In order to curb prospective buyers’ fears, Cape Horn Group has made it their mission to get the word out.

“Now that a lot of brokers have seen the success, we’ve really seen a change,” DeAngulo says. “They have seen the closings, they have heard enough about it where they are comfortable bringing their clients in and feeling like they are being good brokers in doing so.”

With success comes expansion, and both firms have plans to continue to invest in office condos. While Watkins & Company will continue its Equity Plaza project on a build-to-suit basis or as each building is sold, Cape Horn Group recently acquired the 205 West Wacker building in Chicago.

“This concept allows for the business owner to concentrate on running their business as opposed to being a landlord,” Foote says. And according to Watkins, “To sum it up in one word, the main benefit of owning an office condo is control.”

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