How to find office lease comps for my small market
Hi all - an office opportunity popped up that I'm exploring. Note, this is my first time analyzing this asset class.

5k sqft triplex office space near a few of my MF buildings in my local market. Seller has handshake leases in place (i.e. nothing written) that are \~50% under market according to my broker. My broker is excellent, but very old school and doesn't really rely on market data, more so his decades of experience and deals almost everything off market via relationships. I'm trying to confirm his lease statement, but haven't been able to find anything outside of current listings. Is there a good place to find comps?

  
Thanks
[{"id": "g55qt2d", "text": "I would find a new broker that will provide you the market data. Office is a very difficult asset class to underwrite at the moment because not only are you looking at leases, you need to consider if the tenants will be able to pay and actually need office space for when their lease expire. Then you have to account to roll over, concessions, tenant reimbursement for improvements and such. It sounds like you know the market as you have a few MF in the area but longevity is tough especially without good leases as everyone could vacate the day you buy.", "replies": [{"id": "g5b316b", "text": "great advice. thank you", "replies": [], "depth": 2}], "depth": 1}, {"id": "g55rbh2", "text": "Small markets are tricky. I would recommend asking your broker for help with proof of this. \n\nOne problem is that because there is relatively so little in terms of commercial space, there could be enormous differences between the comps that would be hard to understand without detailed investigation.\n\nI live close to a small town historic Main Street that has many buildings with deferred maintenance and lack of parking or functional issues. In my town, retail space could go for 4/SF in one building and 14/SF in the next. \n\nSource: Commercial broker in a town with pop of 7,000 and 20 minutes from the next town.", "replies": [], "depth": 1}, {"id": "g55rlld", "text": "If you haven\u2019t already, get estoppels from the existing tenants before you do anything else so you\u2019ll have in writing exactly what these \u201chandshake lease terms\u201d are. \n\nSomeone familiar with your particular small market might be able to provide a resource for your specific area if you want to update your post with that info. For example: *property is located approximately 120 miles west of Houston*\n\nDepending on exactly where you are, the most used market resources like costar, REIS, etc. won\u2019t have the sufficient data you are looking for. They might have *some data* (if any) but it\u2019s likely not going to be all that applicable to this property.", "replies": [], "depth": 1}, {"id": "g58y6k9", "text": "Best way to get this info is by hitting the phones or trying to get in front of a few local owners like yourself. Asking them about their lease structures/rent. Also, there is nothing wrong with working with more than one buyer to confirm information or get additional. Investors with the best information make the best decisions. Especially right now.", "replies": [], "depth": 1}, {"id": "g5avobi", "text": "5k sf takes as much work as 500k sf and if you lose a tenant you could be dead in the water paying carry costs out of pocket especially in a small market like you mentioned. Personally I\u2019d pass on it, lot of brain damage to do DD and then asset manage it. I honestly don\u2019t know if I\u2019d buy something like that for $1.", "replies": [{"id": "g5b361c", "text": "Well, this is just me, not OPM, so the price point of $500k-1M is what I'm comfortable with on this first type of non-multifamily CRE deal. Don't need to hit a home run.", "replies": [{"id": "g5b4msx", "text": "Cool good luck cheers", "replies": [{"id": "g5b9p8i", "text": "You bring up a valid point tho, so appreciate your comment. Bigger would obviously be better from an absolute yield on time perspective. In this environment with everything so frothy and the underlying economy precarious, I'd rather take on an a project where if everything went south I could still float it with personal assets / W2.\n\nWould you pass on small markets in general? I'm investing there because I know the are and my MF portfolio is there. Thing is, there's such limited MF product that in order to deploy capital, basically need to look at other asset classes (and to be fair, I want to expand my portfolio outside of MF). Either that, or look for a larger geo with more activity.", "replies": [{"id": "g5basbr", "text": "I\u2019ve ended up with office / retail deals in tiny markets through distressed debt pool purchases and they\u2019re a time suck PIA for the asset management team. There isn\u2019t much leasing velocity, tenants (and brokers) aren\u2019t super sophisticated on leases (not to paint broad strokes) so it can take longer to get stuff done and at the end of the day unless you want to own it forever liquidity is kind of limited on the exit - they\u2019re the deals that go up on auction.com like 4 times before some bids once let alone bids clear of the reserve price. But hey look if you know the market and never want to sell it go for it, it\u2019s a small space so it\u2019s not like your build out costs are crazy. I picture it laid out  as like 3 or 4 suites that you will likely lease as is and only have to do basic R&amp;M on the building over the years.\n\nEdit - also for 5k SF in a tertiary market $500K seems really expensive on a PSF basis, I\u2019ve bought high rise office in Florida for less than $100 PSF.", "replies": [{"id": "g5bduuy", "text": "These are all phenomenal points, thank you. I do everything in this case on the side of my tech career, so balancing that with building a portfolio isn't easy, and can get rough if things go sideways. From the color you provided, it's clear I need to get more experience understanding the asset class and associated risks. Tho, tbf, best to get that by analyzing deals and asking questions in addition to reading.\n\nThis building - yes, it's a triplex with a ton of new construction (CVS, starbucks, etc) right next to it on a main intersection. I said I could offer cash for a steep discount and my broker thought it's not a bad idea to run it by the seller, who sounded intrigued (no numbers discussed yet). I like the idea of condo conversions; I use this on my MF portfolio and it is an absolute goldmine given the socioeconomic disparities in the market. Was thinking something similar for office/industrial. There's also 1200 sqft of basement that hasn't been utilized, so rentable sqft is more. However, idk much about the leasing market in my area wherein lies risk.", "replies": [{"id": "g5bf6wr", "text": "Basement space is like really really tough to lease. If you want to convert to a different use your best bet is to tie it up through a longer term PSA contingent upon getting approvals to convert if you can\u2019t do it as of right - you don\u2019t want to get stuck with the building and unable to get the town to change zoning / give variance which can be a really long political process. Your basis creep will likely be pretty high too for the conversion - if you buy it for say $100/SF you could easily spend another $200/sf fitting out the floors for condos / apartments which would mean that to hit your numbers and make money you\u2019d need (in this round number example) to sell your condos for ~$360/SF or rent the apartments for ~$2/sf (which for basis of comparison is what like high end class B stuff rents for in Houston or like brand new class A in Orlando) to make decent risk adjusted returns. Also in condo / resi example the basement unit will likely be tough to tenant / sell. I\u2019m not a tax person but you should also talk to a tax attorney about the condo scenario; you could find yourself getting whacked with ordinary income on the sale of units if you\u2019re considered a dealer (but again I\u2019m not a tax person so can\u2019t talk too intelligently about it beyond humbly suggesting you speak with someone who knows something about taxation on condo conversions and sales)", "replies": [{"id": "g5bojas", "text": "Again, all solid points, especially on the condo sale piece.\n\nYou sound like you're a CRE professional. Looks like it from your post history. I worked in the bond trading department of DB years ago and interviewed to move into their RE Special Situations group...unfortunately didn't work out. The 'what if' will always be there.\n\nCurious if you have any recommendations on getting hands on experience evaluating asset classes at my level? The risks are much less, granted, but the investment philosophy should stay true.", "replies": [{"id": "g5cmq8f", "text": "Yea, I worked for one of the mega funds doing distressed investment across all asset classes for a while now I manage a fund series for one of the big institutions. Love CRE have been in it my entire career (well short career so far I\u2019m only ~40!). \n\nHonestly best way to evaluate before you make the plunge is to do a TON of research on an asset class. When I\u2019d work on niche stuff I\u2019d read as much as I could on it first (white papers, primers {some brokerage shops will put out investing in like MHC 101 to gin up business from guys like you}, general just google) and like obsess over everything in that asset class. I\u2019d also look at a ton of trades in RCA which I appreciate you probably dont have but c\u2019est la vie. \n\nOnce I knew enough about the asset class from research I\u2019d start reaching out to people - would call investment sales brokers first (they always want to talk), then would cold call operators in the space. I\u2019ve also gone to conferences (like I\u2019ve been to the trailer park conference, the seniors housing conference, the addiction center conference...) just to meet people and sit in on the panels. Not saying you necessarily have to do that as they\u2019re expensive and a huge time suck but the biggest piece of that generally is that once you\u2019ve done the basic reading just start talking to people and ask a million questions. Before you know it you\u2019ll be an expert on it before you make your first buy. \n\nAlso as a general suggestion I\u2019d stay away from hotels (unless you have a lot of money to buy a big one (and this is COVID aside the whole industry is messed up now), otherwise your butt is going to be working the front desk), retail (super expensive to fit out when a tenant rolls over and tenants are sticky so if you have vacancy can take a while to lease, also COVID), and office. If you want exposure to those sectors just invest in a REIT, there are some that have had their share prices demolished but they still have fundamentally good assets and are oversold. I\u2019d stay away from seniors too with like a 20 foot stick and this is coming from someone with a ton of seniors experience. \n\nAnyways good luck, have fun! Lots of opportunities out there, just need to kick a lot of rocks to find gold right now.", "replies": [], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "g5aygpx", "text": "No leases? Will they sign new, long term leases before closing?", "replies": [{"id": "g5b3c2h", "text": "Nope. And not sure, getting that info. Honestly, there's been a few properties I've seen like this in my market, done on a handshake deal years ago. No leases, under market rent, seller is old with the building fully paid off and doesn't really care about getting top dollar. Reeks of opportunity IMO if handled carefully.", "replies": [], "depth": 2}], "depth": 1}]