The Basics of Business Real Estate: How to Choose Office Space
Welcome to part 9 of our 10 part series, Idea to Income, where I interview commercial real estate broker, Lauren Wilson. In this episode, Lauren provides helpful insights to business owners who are evaluating business real estate.
A lot of excitement comes with moving into an office space. With that excitement can also come confusing lease terms and not so obvious additional expenses. Lauren does a fantastic job putting this real estate jargon into English and explaining key areas for owners to pay attention to.
- Tips on choosing a broker
- Shared versus private office space
- Helpful rules of thumb on office space spend
- Leasing with plans for growth
- Types of office leases and the expenses involved
We cover a lot and hope you enjoy our discussion!
Where to begin
This is not an area you’ll want to go at alone. Find an experienced advocate that can help you find your space and negotiate your lease. Connect with a commercial real estate broker who specializes in working with tenants within your industry. It will be helpful that they understand how your business operates so they can help you obtain the most appropriate lease.
Shared space or personal space?
After outgrowing your home office, the first decision will likely be between a shared or personal office space. Ultimately, what is best for you depends on your business operations.
The major evaluation likely comes between the cost effectiveness and collaboration opportunities that come with a shared space compared to the prestige and privacy that comes with a personal space.
When should you decide to move into an office space?
It all comes back to understanding your small business financials from episode one. You need to know if you can afford the monthly rent. As you revisit your projections, think about “how much square footage do I need per employee?”
Know what your space will be used for
How are you going to use the space. Are you seeing clients? Do you need a meeting room ? Do you need space and amenities for employees?
Common rules of thumb Lauren sees are spends of around $150 to $175 per square foot per employee. Exact figures depend on the industry. For example, in tech, they’re seeing even closer to a $100 to $120 square feet per person, which has been decreasing over time as they fit more people into less space.
How to make your business real estate decision when you plan on expanding
Let your broker know your growth plans. They will then be able to show you and help negotiate for shorter term/more flexible lease options. For example, it would be prudent to search for landlords that accept leases that are maybe one to two years with the option to extend.
Compare this with a business that knows they’ll be at capacity. If you’re operating a franchise for example, and you know your business plan, you’re likely not going to outgrow that space. With this certainty, you could feel more confident locking in a five year lease with a five-year option or even a ten year lease because you can project your growth and the space requirements that you need to operate without increasing employee count.
How much should you spend on rent?
Especially starting out, try to keep your office expense below 10% of revenues. A sweet spot to aim for is 5-10%.
Types of Leases
There are three main types of office leases
A gross lease – as a tenant, you are only paying your base rent.
A modified gross lease – you’re paying your base rent, plus your proportionate share of expenses or operating expenses per your square footage in that space. For example, you have an office space and you have multiple suites in one area and they’re all on the same electrical. You’re going to be billed proportionate to the share of the square footage that you have within that space.
Triple net lease – includes insurance, taxes, and common area maintenance fees. The landlord passes those fees onto the tenant.
You may want to consider a turnkey office space. These spaces are ready to go with the fixtures and furniture already in them. Office interiors expenses can quickly add up and this may be an effective way to keep costs down.
Thank you to Lauren Wilson of SVN Vanguard for these helpful business real estate tips! With this information, I hope you feel confident starting your office space evaluation.
Remember, this series is all about taking action.
As you think about leasing, remember to evaluate:
- Contact a broker like Lauren
- Know your numbers ahead of time
- Consider your needs for the space
- Evaluate which lease options is best for you
If you’d like help evaluating your company’s growth strategy, be sure to contact us. We can analyze your current structure and make recommendations based off your cash flow and profitability trends.
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