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Business Owners Asking, ‘Why Rent When I Can Own?’

Developers are asking small-business owners why lease when you can own?

With several office condo projects recently completed, including MetroWork on Columbia Street and TR Office by CruzanMonroe above the TR Produce building at Ninth Avenue and J Street, and with more projects in the pipeline, business owners are starting to see themselves as landlords.

“There are significant advantages to owning versus leasing space,” said Ken Calegari, senior vice president of Champion Development Group in Los Angeles and president of its San Diego division. “And those add to the existing interest of buyers.”

Champion is working on a $16 million restoration of the Colonel Fletcher Building at Sixth Avenue and Broadway in the Gaslamp Quarter that will feature office condos and ground-floor retail.

Thirty percent of the 28,000 square feet of office space has been sold and a letter of intent has been negotiated for the ground-floor space. Prices start at $380,000.

Calegari said the benefits of owning office space include building equity, controlling expenses better and offsetting the risk of increased rents.

Hans Strom, president of Strom Commercial Real Estate who is responsible for the marketing of space at the Colonel Fletcher Building, agreed.

“The average tenant in downtown San Diego occupies 5,000 square feet, with 30 percent of the market made up of users of 2,500 square feet or less,” said Strom. “Lease rates in San Diego have gone up and with interest rates at their current level, the lines between leasing and owning have been blurred. There are a lot of small-business owners who would rather put their money into a mortgage instead of rent.”

When complete, the five-story project will feature office space units for sale above 6,500 square feet of ground-floor retail space. Each floor is designed using a unique 2-foot by 2-foot grid system, which allows buyers to design space as small as 700 square feet to a full floor covering of 9,500 square feet.

“We have created flexibility for buyers to pick the size of their space based on needs,” said Calegari.

Calegari and the Champion team recently completed the Samuel Fox Building renovations that include 4,900 square feet of commercial office space. The project, just across the street from the Colonel Fletcher Building, boasts two office condos and 21 work-live lofts.

Nine 2 Five Place, an office condo conversion under construction, is seeing a growing number of entrepreneurs curious about owning versus leasing.

“The beauty of owning your space is the complete flexibility it affords a business owner,” said Malcolm Davies, principal of San Diego-based Sand & Sea Equity Group LLC, the developer of Nine 2 Five Place.

“Not only do the business owners lock in their occupancy costs and reduce their tax burden, they have the ability to leverage the appreciation in their asset to allow them to purchase a new office space as their business grows,” he said.

Davies and principals Anna Marie Barnard and Tracy Mehki, also with Sand & Sea, decided to tap the office condo market in January, when they purchased the vacant building for $13.6 million. This is the trio’s first office condo project downtown.

San Diego architectural firm Nogle Onufer has designed the project and Bycor General Contractors of San Diego started construction last month. Prices start from $399,000 for units within the project.

Nine 2 Five Place is located just off state Route 163 at the corner of 10th and B streets. The six-story, 58,500-square-foot project is the site of the former Chicago Title building.

According to Mehki, purchasing an office condo is similar to purchasing a home. Owning space reduces the possibility of rent increases and the owner receives tax deductions from the interest, maintenance, depreciation and repairs paid, she said.

In addition, Barnard said steady occupancy growth in the condo market downtown has increased the potential among business owners and employees wanting to work downtown and close to their residences.

“The revitalization of downtown in general has brought more buyers to this type of market,” Barnard said.

Amenities include underground parking, gym with showers, conference room and storage.

There also is talk of a private, members-only club on the top floor. In addition, Sand & Sea is in negotiations with several potential buyers for space in Nine 2 Five. Space offered for sale ranges from 880 square feet to 12,500 square feet.

“Business owners can rent a prominent space via a wide array of buildings downtown, but they are still tenants at the end of the day, providing income for someone else’s investment,” said Bob Salgado, vice president of Voit Commercial Brokerage. “Nine 2 Five Place lets them invest in their own piece of an upscale, exclusive, avant-garde business address boasting an exciting, unique atmosphere foreign to the San Diego market.”

Downtown is not the only market seeing an influx in for-sale office condominium projects. CB Richard Ellis reports that four of the 14 office condos in Spectrum at Bressi Ranch in Carlsbad have sold and negotiations are under way for two more.

NCBP Development recently converted the North Coast Business Park in Encinitas to office condos. San Diego developer Lawrence Woodward and Shea Properties built Balfour Corporate Center in the Carlsbad Research Center several years ago.

Office condos are also cropping up across the South Bay. The EastLake Limited Edition development project in Chula Vista is under development by Santa Ana-based Urban West with Phoenix Realty Group LLC. This project consists of 10 units ranging in size from 5,300 square feet to 10,700 square feet.

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