Office condos a bright spot in the commercial market: prices at new projects showing positive signs.

With leasing activity slowing, office condominiums continue to do well with prices up 5 percent this year over last, according to commercial broker Cushman & Wakefield.

The average countywide office condo sales price as of June 30 was $366 per square foot, up from $347 per square foot for the same time last year.

Jennifer Gallivan, associate with Cushman & Wakefield's San Diego office, said the rise in the average sales price for office condos is a signal that business owners still recognize the long-term appreciation potential of owning real estate.

In the past 24 months, Cushman & Wakefield said it completed 59 condo transactions valued at $43.5 million and totaling more than 109,000 square feet.

Twenty-four condos totaling 55,000 square feet and valued at $21 million have sold in the last 18 months at North Coast Business Park in Encinitas and nine units at Columbia Court, a four-story, 28,800-square-foot project downtown have sold since completion in January 2007.

"Office condos are a unique niche in San Diego," said Mike Demko, a partner in Demko Investments Group, the project's developer. "They provide small-business owners an opportunity to own space versus pay their landlord's mortgage."

While sales are steady at Columbia Court, Demko has realized the softening in the market and become flexible with his project. He's leased four of the 25 suites in the building at the comer of Columbia and C streets.

"We need to accommodate to the uncertainty in the market and meet the need of people that still need quality office space at a good price point," said Demko.

Aggressive Pricing

Bob Salgado, a broker with Voit Commercial Brokerage who markets MetroWork, a condo building on Columbia Street in Little Italy, said pricing has gotten aggressive for projects downtown. He said the decrease in activity is a result of the slowing economy and the lack of availability of financing.

"Market activity is tremendously way down on office condos as a whole and that is no surprise to anyone given what the economic conditions are," said Bob Salgado.

However, Salgado said office condos still make sense because they allow business owners to purchase space rather than throw rent away each month.

Gallivan said that the fundamentals of buying versus leasing are still important to consider, even in the soft commercial real estate market.

She explained that the challenge was to get potential buyers to look past the presidential election and the uncertainty in the economy.

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"We are experiencing heightened tenant concessions and flexible rental rates in this market, luring more tenants towards leasing. However, once the market recovers, concessions will disappear. Healthier capital markets will encourage more building sales and tax basis increases will be passed on to the tenants, contributing to higher costs of leasing," she said.

Gallivan said there are 58 office condo projects in the county; nine of those are downtown.

Matt Carlson, associate director with Cushman & Wakefield, estimates that over a five-year lease, rent costs will increase 15 percent compared with office condominium owners increasing their equity by approximately 15 percent.

Carlson said with the costs of tenant improvements rising, tenants should realize they are investing in space wherein they will eventually become landlords at the end of the lease.