Forget the Rate, Focus on the Space

Rental rates are probably the single most focused upon term in an office lease. However, the “face rate” (price per square foot) is only one part of the equation in determining rental obligation. The fact is that face rates are more important to landlords and lenders. For tenants looking for smaller space, obsessing about rental rates is really only important when bragging at a bar.

The fact is that architectural efficiency will trump rental rates every day of week. Why? Simply put, it’s easier for an organization to find space that’s 20% more efficient than to reduce their rental rate by 20%.  The effects of architectural efficiency are especially powerful when looking for smaller office spaces.  Most 10-15 person organizations seeking some combination of open workspace with a few private offices, conference room and pantry will find themselves comparing options measuring 1,500 to 2,500 rentable square feet.  In absolute numbers, a 1,000 square foot range may be quite reasonable, as well as necessary create a thorough search of options. However, that extra 1,000 square feet adds 67% to the rentable area of a tenant that could fit into 1,500 square feet and 500 square feet adds a 25% premium if the tenant can fit comfortably into 2,000 square feet.

The beauty of focusing on space efficiency is that it frequently leads to much higher quality options for organizations. There are a growing number of landlords offering “plug & play” Enterprise* solutions and very high quality “spec suites” (small office suites built on a speculative basis) in buildings laden with amenities such as conference rooms cafes and fitness centers. Space in these buildings are typically priced at a premium. However, these options also allow an organization to lease only enough work space needed for its team. If they can eliminate their pantry, large meeting area and common lounge space, the space efficiencies can be enormous and more than  make up for any rental rate premium charged by the landlord or enterprise operator.

For example, a 12 person organization typically requires approximately 2,500 square feet in a mostly open workspace, including  1-2 private offices, a small pantry and a meeting room seating 8. At $50 per square foot, their monthly rent would equal $10,417. Alternatively, if that same organization found a more efficient suite measuring 2.000 square feet in a higher quality building at $60 per square foot, their rent would be $10,000 per month (4% lower than the $50/SF option).  If the same organization found a 1,500 square foot Enterprise solution with workspace for 12 at $75 per square foot, their rent would drop to $9,3875 per month.

As size increases, the potential savings become even greater. An organization with 50+ members can look at taking a huge step up in quality of the workspace within a highly amenitized building or an Enterprise solution without a cost penalty if not a substantial savings.  However, there’s no single solution that right for all organizations. When weighing “what’s right for us?”, companies should consider the following:

  • Timing vs. Tailored – Need to move quickly? Spec suites and Enterprise spaces are Plug & Play. While these options typically provide high levels of finish, they may not fit your organization perfectly. Having space built to your specifications in an amenity rich building can create the most efficient space, but can also add  >6 months of lead time, as well as a longer minimum lease term.
  • Term – Spec suites and Enterprise solutions are typically available for shorter lease terms (1-3 years). Moving is a hassle, but flexibility powers a company’s nimbleness.  If your projected needs are relatively stable for 5+ years, a space built for you may be best.
  • Security – sharing meeting areas and common space may be an insurmountable challenge for organizations working with confidential information.
  • Culture – standalone suites facilitate cultural imprinting more easily than in a shared environment. However, having some shared areas may also become a desired aspect of your organization’s culture.

 

 

*An Enterprise office space option typically features immediately available, “plug & play” workspace for >10 team members, plus some combination of shared common amenities including pantry, meeting rooms, lounge, cafe, etc. 

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