Choosing the right office space can make or break a business. It can be overwhelming especially with dozens of options to choose from; how do you zero in on the right space? In our experience, businesses that take some time to “pre plan” before they begin their search have the best outcomes in finding the right space for their company’s success.
It can be as simple as listing your immediate and future goals and inventorying what is and what is not important for your business in terms of achieving these goals. This preliminary list of things to consider will be useful tool throughout the process.
Location is always one of the first items to consider when leasing office space and one of the primary reasons companies move. Questions to consider when starting your search are:
In today’s “perk economy”, you’ll want to shop around for amenities that will make your employees feel valued and help to simplify their day-to-day lives.
How much space do your need? How will that change during your lease term? This is especially important to consider if you are entering into a long-term lease. Will the complex be able to accommodate your expansion? Can you get a right of first refusal on contiguous space or some other expansion option?
What is the actual space within your suite – i.e. the usable space versus the rentable space? The rentable space is the amount of space you are paying for, which often includes a portion of the common areas, corridors, lobby, washrooms, etc. The usable space is the actual square footage. The differential is referred to as either the add-on factor or the loss factor. Some buildings have low add-on factors while others are high. This will impact your bottom line and how much space you will ultimately need to lease. It is always a good idea to find out what is the typical range for the add-on factor in the market where you are looking for space.
Similarly, it is also important to consider how efficient the space is for your particular ideal configuration. Required circulation space within your suite is always a factor that impacts the bottom line. Not all building “foot prints” layout equally well for a given requirement. The distance from the common corridor to the window line will impact how your space lays out. Offices and cubicle layouts can require circulation space of a low of 18% to a high of 35% depending on how highly built out the space is.
Most landlords will provide some improvements to a space. The shorter the term the less they will do. Generally a three-year term will include building standard paint and carpet and a longer term will allow for other improvements. It is not uncommon to receive anywhere from $3 to $5 per rentable square feet (RSF) per year of the term for construction. The lower the construction costs the more aggressive a landlord can potentially get with the initial base rent.
Factors landlords consider when determining how much they are willing to contribute toward construction include length of the lease, current condition of the space, how leasable the improvements make the space and the strength of the tenant. Note, if as a tenant you are a newer entity or do not have strong financials be prepared to provide additional securitization such as a larger security deposit, a letter of credit or possibly a personal guarantee for all or a portion of the lease which could include construction and deal costs.
A space that has existing conditions as close to your basic requirements will be your best economic option in terms of rental rate because the existing conditions of a space will impact the construction costs.
When comparing leasing options it is always important to make sure you are making a true “apples to apples” comparison. There are many ways rents are quoted. If you are quoted $17 per RSF triple net you are paying $17 per RSF plus your proportionate share of real estate taxes and operating expenses from $.01. Depending on where you are leasing space this expense may range anywhere from $7 per RSF per year to $14 per RSF per year and more in some markets. Therefore a rental rate of $21.99 per RSF, which is leased on a modified gross basis and has a current base year for taxes and operating expenses or does not pass through any increases for real estate taxes and operating expenses, will cost you less than a space that is being rented for $17 per RSF triple net.
It is also important to find out the hours of operation for the building (i.e. when does the heat and air conditioning shut off and the cost to have it run longer if needed). How electricity is billed for lights and outlets, who pays for Internet and voice and data installation and services and if janitorial services are included in the lease are a few other things to consider. These are just a few of the hidden costs that you may encounter.
It is important to give some thought to what type of image you want to project to your clients. Some things to consider are how new/modern is the building? Is it considered a class “A”, “B” or “C” building? Is there significant deferred maintenance, do they provide some form of security and who are the other tenant’s in the building. Other tenants in complex/building will impact the “feel” of the building. If there is a school, collection agency or telemarketing company in the complex the feel and image of the building will be different than if there are corporate headquarter offices without a lot of traffic, etc.
Who owns the building and what is their ownership objective? Are they putting as little money as possible into the complex and planning on flipping it in a few years? Are they planning on keeping the building long term? Are they one of the tenants in the building? Who handles the day-to-day operations? Is the management company onsite, easily accessible and responsive to tenants? These are also important considerations when evaluating office space.
Once you have located the “right” space and negotiated an attractive deal that works for your business, consider having an experienced real estate attorney review your lease before signing – one with proven knowhow of commercial real estate leases.
We hope you find these suggestions useful and wish you every success in your new office space!