Low interest rates add to appeal of owning real estate, but experts caution companies about taking on too much debt
Condominiums have been a hot asset class in Ottawa in recent years as buyers look to build equity and take advantage of low interest rates.
But while residential towers continue to reach higher with each new development proposal, commercial condos – owner-occupied office or light industrial units with common amenities and building systems – have lagged behind in popularity. Many local firms still opt to lease rather than buy.
However, at least one Ottawa landlord and developer is betting on greater interest among businesses in owning real estate.
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Huntington Properties is marketing two commercial condominium projects on opposite ends of the city. The Mark is located on Richardson Side Road in Kanata, while the Profile is on Thurston Drive southeast of downtown.
The company’s officials are predicting commercial condominiums will hold much of the same appeal as their residential cousins.
Many small business owners “feel like they’re flushing money down the toilet by leasing or renting space,” said Derek Noble, a partner at Huntington.
“You’d be amazed at the number of people that approach (us saying) their primary concern is … to invest in the capital of their business.”
It’s unclear how large the commercial and industrial condo market is in Ottawa. But Huntington, which also leases space in its growing portfolio of more than 20 office properties, believes it’s offering a unique product.
The two projects are supposed to appeal to higher-end buyers, said Craig Whitten, another partner in Huntington’s condo projects.
That means smaller units of roughly 1,100 square feet and amenities such as energy-efficient systems and 10-foot ceilings.
But while the prospect of building up equity might be appealing, buying instead of leasing isn’t for everyone.
Companies can only carry so much debt, said Norton Rose real estate lawyer Ned Steinman, so those who choose to take on mortgages will lose their ability to raise capital for other projects.
“If financing of your business at any level is important, then tying up money in real estate is generally not a great idea,” he said.
There will be companies who are better suited to the idea than others. A startup in the high-tech sector isn’t a likely buyer, said Century 21 realtor Bruce Firestone, since it will probably need to move offices many times as it expands.
“For a lot of fast-growing companies or fast-changing companies or companies that might at some stage try and sell their business, maybe leasing is better,” he said.
“But for lots and lots of people who are in the plumbing business or the kitchen cabinet making business or light assembly business, I think owning does make sense because those are very stable businesses.”
So far accountants, lawyers and small consulting firms have expressed the most interest in Huntington’s projects, said Mr. Noble.
The company hasn’t yet finished selling spaces in either of the complexes – none of the units in the Profile are sold while the Mark has about 40 per cent of its space still available – but the company is already anticipating it will be a success.
Mr. Noble believes the three or four other projects it hopes to develop in the future will help to further remove what he says is the main obstacle to the success of commercial condos: a lack of supply.
SIDEBAR: LEASING VS. BUYING
The benefits of a business owning its own office space are obvious: rather than paying for a lease, companies can use that money to buy a property that they’ll eventually own outright.
But how do the costs compare?
Businesses will in most cases probably end up spending less if they buy a condominium, said Mr. Firestone.
According to Huntington Properties’ calculations, the cost of buying one of its units is slightly less expensive than leasing. The down payment and mortgage of a 1,079-square-foot space will come in under the $472,302 it would cost to rent an equivalent space over the lifetime of a mortgage, according to the company.
However, those figures are based on the assumption that interest rates remain equal over the course of 25 years. They also don’t include the cost of paying for condo fees.
That doesn’t account for the additional revenue sources that buying a condo can provide, though.
Mr. Firestone said there are hidden benefits such as the ability to rent or lease out space that isn’t being used.