What's the Real Cost of Leasing Office Space?

Office leasing costs can take up a significant portion of your business budget, and there are a number of factors that go into determining whether you can afford your next space.

This handy guide will walk you through what to expect when leasing office space and how to be smart about paying for only what you and your staff need.

Determine the Size of Your Office Space

This is one of the first decisions you'll need to make in your office search, and the answer will depend on factors like how many staff members you have and whether you'll be receiving clients at your office. A good rule of thumb is to estimate around 150 to 200 square feet of space per employee.

Do the Math

Commercial real estate listings present the rental price as a per square foot cost, either per month or per year. In order to calculate commercial rent, the first step is to multiply that price by the total number of square feet of the office space.

If the rental price is for the year, simply divide that cost by 12 to find your monthly base rent. Notice we said base rent. Different types of commercial leases—triple net or percentage lease, for example—will include different forms of inducements and fees that combine to determine your actual monthly outlay. (See below for more on the various lease types.)

In commercial real estate, there's a difference between usable square footage and rentable square footage.

Usable square footage: Like its name suggests, this is the space meant to be used exclusively by your staff.

Rentable square footage: In addition to your exclusive office space, rentable square footage includes common areas that your landlord will permit you to use, including lobbies, reception areas, elevators, and stairs.

Loss factor: This is calculated by finding the percent difference between the usable square footage and the rentable square footage.

Factors That Determine Office Rent

There are additional factors that will impact how high or low your office rent will be each month.

Size

It's important to carefully consider your business and staff needs before you rent a space that is too big. On the other hand, it can be expensive to move offices later if you find you are outgrowing your space. If you have plans to expand your business, you'll want to find a flexible office space that can accommodate future growth.

Building Quality

Everything from the age of the building to the included amenities and features will drive available rents. Newer, more modern office complexes may have achieved Energy Star status or include various other high-tech upgrades that will appeal to office tenants and therefore drive demand. A more dated building in need of some renovations may advertise lower rents but could be in a less desirable location.

Location

As with all things real estate, location is everything. The more convenient a location, the pricier it will be. If your would-be office space is in a popular part of town or has any number of other perks for your employees, expect your monthly rent to rise.

Type of Lease

Commercial leases come in three basic types: gross, percentage, and net leases, which has two subcategories—double net leases and triple net leases. A gross lease, also known as a full-service lease, is the simplest type, and it means just what it sounds like: The landlord charges the tenant a gross lump sum payment every month. Commonly used in retail malls, percentage leases charge tenants a base rent plus a portion of the gross sales they make from doing business in the building. Lastly, a net lease consists of a base rent amount plus various building-related expenses. The base rent in a net lease is usually considerably less than the amount of a gross lease, but the total amount grows as “net" charges are added. Often displayed as "NN" in property listings, double net leases charge the tenant a base rent plus the tenant's share of property tax and insurance premiums. Tenants also pay for their own utilities and janitorial expenses. The triple net, or "NNN" lease, charges tenants a base rent, utilities, and janitorial expenses, plus their share of the property tax, insurance premiums, and Common Area Maintenance (aka, CAM) fees.

Leasing an affordable and appropriate amount of office space is one of the most important decisions you can make for your business. Choose wisely and your bottom line will thank you.

This article was updated on 12/12/2024