No matter if you’re looking for your first office space or if you’re moving into a new one, cost should always be one of your top concerns. Often noted as one of the biggest expenses for a business, office space costs can’t be overlooked. Nearly every company is going to pay for an office, but pricing one out isn’t always straight forward. If you are asking yourself, How much does an office space cost?, you’re not alone.
In practice, the cost of office space depends on several different factors.
What determines the cost of an office space?
Every office space is different, and each will have its own costs associated with it, but in general you can break down all of your expenses into a few principle categories:
- Base Rent – What the landlord is charging for the space
- Operating Expenses – Your portion of building costs such as maintenance and janitorial, a portion of which is passed through to you
- Taxes – Your portion of property taxes passed through to your company
- Utilities – Included bundled or itemized, these are costs for water, electricity, cleaning and more
- Business Costs – Expenses to your business outside of your lease, essentially the cost of using the space for your company
- Capital Expenses – Includes upfront spend such as furniture and moving expenses. If you are building out your space, other costs will include architectural, engineering and construction costs.
These are the main costs for an office and no matter where you decide to set up your space, you’ll be paying for these in one way or another. Your concern shouldn’t be specifically on what you’re paying for in terms of these categories, but instead on how much each of these categories will cost you and how they compare to standard market prices. It’s important to note that pricing can be different from market to market and building to building. If you haven’t done so already, it’s a good idea to secure the services of someone who will represent you in the lease negotiations – a tenant representative (rep) broker. It’s not only wise, the price is right: tenant rep fees are paid by the landlord, not you.
Breaking Down Expenses in your Rent
Base Rent Calculations
When you look at base rent, you want to be sure you’re getting a fair price, but that’s impossible to determine if you don’t know how that number is calculated. Not only will you need to know how your square footage is being calculated, you’ll also want to look into other items such as the building load factor, the age of the property and the infrastructure within the property, and historical property tax and operating expenses the past 2-3 years.
There are different ways you can pay your base office rent and operating expenses. While the names used to label leases vary from market to market, they generally fall into two categories: gross leases and net leases. Within these two categories, there are several variations – here are examples of some common leases:
- Full Service Gross Leases typically include base rent, taxes, operating expenses and may include some portion of utilities and is common to multi-tenant office buildings. With an FSG lease, you don’t have to handle any other expenses over and above the property owner’s invoice. The owner is responsible for maintaining the entire building, paying taxes, negotiating vendor contracts, and covering all the expenses. Your portion of these operating expenses is outlined in your lease – it’s prorated to the amount of space you occupy. Keep in mind that after the first year of a multi-year lease, you will generally see an escalation of your rent each subsequent year.
- Modified Gross Leases typically includes base rent, taxes, operating expenses and may include some portion of utilities. With an MG lease, you also receive a Base Year for which taxes and operating expense costs will be measured against for each following year. For example, if your MG lease has a Base Year of 2019, and taxes are $5 per square foot and operating expenses are $6 per square foot in 2019, you will be responsible for payment in the following years equal to the amount these costs increase. If taxes increase to $7 per square foot in 2020, you will pay the difference above the Base Year and be responsible for the $1 per square foot increase. Keep in mind that after the first year of a multi-year lease, you will generally see an escalation of your Base Rent each subsequent year.
- Triple Net (NNN) Leases are common to free-standing, single-tenant industrial and retail properties, in addition to many office properties. They are also common to many multi-tenant buildings as well. All the other expenses such as property taxes, insurance, maintenance, and utilities are your responsibility. With this type of lease, you typically pay the base rent only to the property owner and pay the expenses separately. Aside from the lower rent, this type of lease gives you more control: depending on the situation, you select and supervise the vendors who will be working in the building. Multi-tenant building owners, however, typically control the vendors and the maintenance schedule, and identify the expenses you will pay.
When you’re paying for operating expenses, you’re paying for some of the common areas, services and maintenance for the whole building. You may end up seeing these costs bundled into your lease in different ways. Your tenant rep broker will be able to help analyze these costs so you can really do an accurate comparison.
When it comes to operating expenses as a whole, you want to know what line items are included in the total. An older building might have higher operational costs in some cases just for maintenance and upkeep. Similarly, a newer building with a lot more common space might end up costing you more for space you potentially wouldn’t use. As long as you’re thinking about your space utilization, you should be able to judge what expenses you want to incur. A higher Operating Expense cost isn’t necessarily a bad thing- It could mean that the building offers a lot of services and that the landlord takes very good care of the building.
Death and taxes are famously said to be the only certain things in life and in a lease, taxes are certainly unavoidable. While they may be allocated to you in a variety of different ways, they are always something that is included in your lease. In the most straightforward way, you will pay a portion of the taxes for the building as specified in your lease. In some leases, the taxes will be paid by your landlord but included as part of the base rent or in your operating expenses. In other cases, if a building has received a tax abatement, the landlord will pass through the savings to you for the first year of your lease.
Utilities can include a number of different costs and can be paid in all sorts of different ways. You may pay utilities directly, as part of your lease, or have some combination of these. When considering how much utilities are going to cost, you’ll want to get an estimate on what your usage might be and where possible, compare to average rates for the building or area. This is difficult information to get, so you will likely need to lean on your tenant rep or other professionals (i.e. engineers) to help you understand these costs.
Some offices need more electricity than others, especially if you’re running a server room. Other buildings might have higher HVAC costs if they aren’t insulated well. There’s really no way to know for sure what utility costs are always going to be unless you pay a fixed rate. In any case though, the most important thing for you is to be honest about your needs and usage. Don’t underestimate your costs before signing a lease.
Additional Business Costs
Though not part of your lease directly, your business expenses with relation to your new office space are just as important a consideration as the rent itself. These can include moving costs, construction, signage, office supplies, insurance requirements, tech support costs and so much more. These can be difficult to estimate because they vary from business to business.
It’s often best to look at your generic day-to-day expenses first. These are the total sum of your equipment, furniture and necessary office consumables, divided into a monthly total. This estimate is easy to do, but easy to get wrong. So, try to estimate high. Realistic estimates are critical for making sound decisions for the future.
Once you have the generics considered, you can move into looking at the pieces that will be determined by your landlord’s requirements. These most notably are your buildout and insurance requirements. An office buildout not only has a per square foot cost associated with your contractor, architects and engineers, but you may also need to budget for the cost to restore the space to its original state. When it comes to insurance, you’re going to have a set of necessary requirements from the landlord as well as any legally required insurance for your area. Estimating that cost is as easy as calling an insurance broker who can help you figure out how much coverage you need.
Beyond this, the cost of your office operation and work becomes specific to you and your business. While you can estimate many of the costs you might face, it’s important to be honest and budget for some unexpected expenses. If your budget is too low, even a small cost could put you in red and that’s never good.
Comparing Your Office Costs
The most important part of knowing what your office space could cost is so you can make accurate comparisons to ensure your office space decision aligns with your overall business goals. At Truss, all of our listings included detailed pricing information so you can easily compare your options side-by-side. If you’re confused when looking at costs, don’t worry, your tenant rep broker can always help you out. When you’re ready to start your search, our tenant rep brokers can help you break down your potential costs to compare them in meaningful ways. They have the skills and knowledge necessary to ensure that you can make the best decisions for your company moving forward.
Your Journey Is About to Begin
Now that you’ve got the basics under your belt, you’re well on your way to understanding exactly what you need to look at and how to budget for your next office space. It can be daunting at first, but your tenant rep broker will help you with the more complicated items. The important thing is that you’ll know what the numbers mean so you can make smart and informed decisions for your company.
Let us help you find your next office space. Please visit us at www.truss.co Take virtual tours, see all-in pricing, free of charge.