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Businesses Buying Into Trend

Most consumers have had it hammered into them that buying a home is better than renting one, factoring in all those tax breaks, as well as the pride of ownership. Businesses are increasingly coming to that same conclusion, buying their own office condominiums in suburban areas throughout the county.

“Most of the time, renting versus owning is less expensive, when you consider the tax advantages and write-offs for the company,” said Brad LaRue, the vice president of development for Marin County-based Venture Corp.

The company recently broke ground in Oceanside on its second project in San Diego County, the $22 million Venture Commerce Center in Ocean Ranch, which was preceded by the $40 million office condo development in EastLake in Chula Vista.

The first phase of the Ocean Ranch project offers 24 properties, constructed in four separate buildings, ranging in size from 1,147 to 3,290 square feet or larger, and ranging from about $400,000 to $759,000. The properties are expected to be ready for occupancy in January.

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“Smaller seems to be more in demand,” said LaRue. “Typically, we have real estate, mortgage (brokers) and stockbrokers, financial services companies, attorneys, architects and engineering firms, and we have some light import/export types of companies that need some storage.”

Enrique Martinez, who owns Picket Fences Landscaping, Inc. in EastLakes Trails, has bought into the EastLake development, hoping to take advantage of “the big industries around the area that may require services.” Martinez, who plans to move in December, said he now uses a trailer as a home office.

A pioneer in the office condo market, Venture Corp. bills itself as California’s largest developer/builder of for-sale business properties, but, said LaRue, “a lot more people are jumping in, and I definitely think it’s a trend.”

“This can be an investment for a company to own real estate,” said LaRue. “You don’t have to ask a landlord if you want to make improvements. You are the landlord.”

Not all of the product is the brand-new, ground-up variety.

CB Richard Ellis’ San Diego office and Yale Properties USA, for instance, have teamed up on an industrial and office condo project called the Kearny Mesa Complex , a 152,000-square-foot business park at Clairemont Mesa Boulevard and Complex Drive. The four buildings, built in the ’70s, are now offering from 560 to 4,000 square feet, at prices ranging from about $225 to $300 a square foot.

“We focus on ground-up development, but office condo conversions are a growing trend as well, and, if the property is configured properly, it works out well,” said LaRue.

But office condos are not necessarily a good deal for every company. Jeb Bakke, senior vice president for the Los Angeles-based CB Richard Ellis’ San Diego office, says that “the buzz is a little bit overblown in the marketplace.”

“It’s right for the right kind of company that does its homework,” he said. “A company that is rapidly growing, and is doubling and tripling in size, might not be a candidate.”

With interest rates relatively low, and generous Small Business Administration loans available, many businesses are being advised by their accountants, financial planners and real estate brokers to take the leap into ownership, said Bakke.

“From a tax standpoint, there are advantages, and knowing that you don’t have to deal with a landlord,” he said. “If the company is stable, it might make sense to invest in one of these. And you’re shielding yourself from higher lease rates, and hedging against future rent increases. But people who are speculating are not doing as well.”

LaRue agreed that it’s not a one-size-fits-all scenario.

“I don’t think there are many downsides in terms of small businesses purchasing,” he said. “But for a company that is doubling or tripling in size, it might not be a good candidate. But they can always turn around and sell it in a secondary market if they outgrow the space in three or four years.”

Mark Heavey, Venture’s chief operating officer, considers San Diego a prime market for this kind of development.

“We have seen some of our buyers buy in two or three projects, as they expand their businesses, but they’re stable, and not in a startup mode,” he observed.

For Heavey, “San Diego is a great market and growing,” primarily because it’s a small-business-oriented, entrepreneurial town.

“We don’t sell to a lot of big companies,” he said. “Typically, they don’t own real estate, they lease space.”

Much of the office condo development tends to go on in suburban sub-markets, said LaRue, noting that “it puts small businesses closer to homes, where neighborhood residents can walk to work, or take a four-minute drive, as opposed to commuting from Chula Vista to Downtown San Diego and fighting gridlock.”

Matthew Reid, the vice president of development for Ryan Cos. US, Inc.’s West division, noted that, “90 percent of the businesses in Southern California have fewer than 75 employees.”

“There is a significant amount of entrepreneurial businesses here,” he said. “You see a need for small businesses to own their own condos.”

The San Diego office of Ryan, which also has locations in Arizona, Illinois, Iowa and Minnesota, recently announced its acquisition of 20.82 acres of land for development within the Bressi Ranch Corporate Center for $17.6 million. The company plans to develop 280,000 square feet of industrial/flex condos and stand-alone office condos, ranging from 1,800 to 5,000 square feet.

Located in Carlsbad at the corner of Innovation Way and Palomar Airport Road, the land is at a main entrance to the Bressi Ranch center, a 132-acre campus-style, mixed-use business park. Upon completion, the project will accommodate up to 2.1 million square feet of development.

Ryan also is planning to develop in Santee the RiverView Professional Center, which will total 62,500 square feet in six one- and two-story buildings, offering for-sale and leasing options. Groundbreaking is slated for the first quarter of 2006, with completion expected during the third quarter of that year.

Owners of smaller properties might be limited to what is called “air space,” where you don’t own the building and land. But there are options for owners who are shopping in the 4,500- to 15,000-square-foot range, according to Scott Cairns, the vice president of business development with Smith Consulting Architects in San Diego.

With so-called postage stamp-style office condos, firms buy their own building, and the land beneath it, while all of the owners on the condo campus , which can range from five to 15 buildings , share the costs of the landscaping, parking lots and other common areas.

“Most are little guys, in accounting, manufacturing, a whole array of different businesses, and sometimes these are satellite offices,” said Cairns. “They’ve been in, say, the 2,000-square-foot range, renting, and now they can own, as a tax write-off, and move up.”

This market is so competitive, he said, that builders are incorporating such amenities as patios for employees, and, “The architecture is more involved.”

Overall, said Cairns, “It’s a more popular way to do it. But if it involves any less square feet, than you’re talking about suites and air space.”

It all comes down to construction costs.

“Smaller is not very economical,” he said.

Larry Jackel, senior vice president at CB Richard Ellis in San Diego, said that it’s a matter of supply and demand.

“The smaller they are, the more expensive they are,” he said. “Construction costs are so dramatic, steel is going up, wood is going to be skyrocketing. It’s astronomical. It’s an economy of scale.”

Builders who have their projects in the pipeline and can have them sold in the next two years or so, said Jackel, can take advantage of this “terrific window” that now exists for office condo projects, for either brand-new construction or conversions.

But will this window of opportunity last?

“I hope so,” said Reid. “But if your crystal ball is any clearer than mine is, I’ll let you answer the question.”

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