Top Three Things To Consider If Your Firm Leases Office Space

By Lynn Drake
Compass Commercial

The most important things to consider when your office lease is about to expire, or when you need some space, are:

1. Know the numbers,
2. Right size the space and
3. Location, location, location.

Know the numbers
Last year our firm printed a blog that asks the question, “Do you speak lease?” It is important because you need to understand what type of lease incentives your prospective landlord is actually offering verses another landlord down the street. Seventy percent of the office buildings out there charge base rent, plus electricity and a base year pass-throughs on the common area costs. Some are truly all- inclusive and some charge base rent, plus all of the common area costs, plus utilities and janitorial. You are looking at a $10.00 delta in this difference. That means for a 5,000 square foot space you could be paying an additional $50,000 if you didn’t get all the facts straight. To make matters more confusing, most tenants probably get several flyers a month offering teaser rates. In my world that means verify, verify, verify.

Knowing the going rental rates and incentives is also paramount. Co-star publishes a market rate report, which is an average of asking rents. It doesn’t take into account what the deals are actually being done at, or what carrots the landlord provided prospective tenants. At one time I had a client who used this report as a benchmark to negotiate a substantial lease. Having worked with them for a while they agreed to let us to re-negotiate the lease. Between incentives and reduced rent their cost was reduced by $6.00/square foot over a seven-year lease term. A very substantial number. Real estate is often the second or third highest cost on a profit and loss sheet. It is often overlooked as an area for cost reduction.

Right size the space
The second most overlooked area is how much space does one really need? For that matter do you really even need a physical office in this day and age? There are many virtual offices that give you an address, phone number and office rental by the hour. This is a much cheaper alternative than actual brick and mortar.

The “old” way to estimate how much space your firm needs is to multiply 250 square feet by the number of employees. With 15 people reporting to work every day then you need 3,750 square feet. According to research papers printed by Knoll, there can be up to 5 to 7 people sharing a desk now. It is best to get a detailed account of everyone’s jobs and the need for conference and storage space before actually providing a number, but this formula can be used if you are trying to put a budget together for some space.

Remember you may negotiate a new lease every one to five years, but your landlord does it every day!

Location, location, location
Many years ago I completed a study for a Fortune 500 company on why their turn rate on their offices was so high. While there were many answers, the most common reason was every time the person running the office changed, they wanted to relocate close to their home. For larger organizations use regional people to make these move decisions. It is expensive to relocate an office and should only be done if it makes both financial and business sense.

Determining where the office should be is a tricky decision. Do you need to be near your top client? My largest client is over 1,000 miles away and it hasn’t made any difference. What types of people are working in your offices? Do they have their own cars or do they take a bus? Is the location easy to reach? Or is the road leading up to the space impossible to due to traffic patterns? Parking is very expensive. In some areas moving to the fringe of a central business district might make the difference of not paying for parking. If your firm has international visitors how long does it take to get to the airport? Are there hotels and restaurants in the area to accommodate their needs?

Most people would agree that the farther one moves out of the central business areas the less expensive rents usually are. However, before this downturn in the economy it was very difficult to get the best people to take these jobs. No one wants to spend 60 to 90 minutes driving to work. While in this economy people are willing to drive a long way, don’t expect this to be the case when the unemployment rate drops.

I know I only said three things, but this last item should not be overlooked: Read your lease.

I mean in detail. Do not skim through it. Does your landlord have the right to relocate your office? If you have a renewal option do you know when it needs to be renewed? Do you have to notify your landlord if you aren’t renewing? If you stay past your lease expiration does your rent double? It does in many leases. Some landlord will waive this, but some won’t. While a lease has many legal points it is also the place where a surprise comes up. We strongly recommend hiring a REAL ESTATE attorney – not an attorney who is an all-around business attorney, but someone who does this day in and day out.

In summary know your numbers (or get someone who can help you decipher them), determine how many square feet you really need and really look hard at your decision as to where you locate. Of course, as an owner I broke the cardinal rule and put my office near my home. Don’t let your staff get away with doing that or your company will be moving every time a new person joins the firm.

Lynn Drake is president of Compass Commercial in Troy, Mich., representing office and industrial tenants. Learn more by visiting www.compass-commercial.com or calling (248) 341-2410.