If you are a small business owner who is looking to lease office space for your business, then this article is for you. In order to get the most helpful information possible, we talked with Adam Von Romer, CCIM (Adam’s Website), Senior Investment Sales Associate at the Fitzgerald Group. Adam has 30 plus years of commercial real estate experience. Keep an eye out for Pro Tips from Adam and other commercial leasing professionals throughout the article!
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Step 1: Estimate Your Budget
How To Estimate Your Budget
Total Monthly Payment = Square feet of office space leased x base rent charge/sq. foot + Square feet of office space leased x CAM charges/sq. foot
Knowing your budget will help you narrow down options quicker and keep you from getting sucked into paying higher payments than you can afford. What you actually pay will depend on your type of lease and what charges are included.
Here are the primary factors to consider when estimating your budget.
Monthly Lease Payment
One of the biggest factors affecting your monthly lease payment is the quality of the building you are in. You can get a general idea of the quality of a building by it’s class designation or grade (A,B,C). (There are also technically class D buildings, although they are much rarer and not really worth discussing as most businesses would not utilize such space).
Here is an explanation of each class and several examples of what kind of businesses most often lease that class for their office space needs.
Class A – High Profile Law, Marketing, Design, and Financial Firms
Class A office spaces are top-notch in quality, also costing the most per square foot. These buildings are built to impress, often having soaring atriums, marble walls, and concierge/valet services. Class A office space is all about hosting high-profile clients, which is why this is probably your grade of choice if you are a high-powered law firm or or financial firm who needs to impress clients.
In general, A space does not really have much of an advantage over B space for the average business owner who just needs to lease office space for his or her employees.
Here are some other common characteristics of Class A buildings:
- 24 Hour Building (If located in what is considered a 24 hour city)
- 1-2 years old (or recently remodeled from top to bottom)
- High-rise style
- Top Notch Internet Wiring
- Luxurious elevators, fixtures, and services
Class B – Businesses That Want A Nice Space But Don’t Have To Have The Best of the Best.
B grade office spaces start at around 70% base cost per square foot of A class.There are two kinds of B grade office spaces.
First, a B grade office building could be a previously A grade building that has been downgraded. This is generally because the building is starting to show signs of wear or because the market has changed and that area of town is not as desirable as it once was.
There are also purpose-made B buildings. These are buildings that were purposefully constructed to provide functional office space for a cheaper price than A grade space. In most cases, the buildings are just as functional as A buildings, they are just not as fancy. Firms that do not entertain high-profile clients often lease these spaces. Other businesses such as travel agencies, businesses that just need back office operations, and businesses that just need general workspace for their employees often lease these spaces.
Class C – General work-space for businesses, Bail Bondsman, Immigration attorneys, social work businesses
Class C buildings are either A buildings that are really getting old (10-15 years) or B buildings that are older than say 5 years or so and are starting to show signs of wear. Again, these buildings are generally functional, they just may not look as nice and their technology, wi-fi, etc is generally older than Class A or B buildings. C Class office space starts at around 50 to 70% of the cost of A grade space.
Again, if you just need to rent office space for your employees, C buildings can be a good option. Just make sure you account for possible renovations if you need newer technology or nicer atmosphere. If you are a bondsman, immigration attorney, or social worker who just needs cheap space, class C office space could be perfect for you.
B Grade Office Space is Our Recommendation for the Average Small Business Owner
Unless you need to entertain high-profile clients, B grade space should be more than enough for your office space needs. It is significantly cheaper than A grade space but still has all the functionality and cleanliness of A grade, just without the frills and extra amenities.
A Note On Class Designations
Keep in mind that class designations are not an official grading. They are advertised by the business owner themselves. There is however generally consensus among the brokers as to what is actually A, B, and C grade space.
Other factors that go into calculating the monthly lease costs:
Length of Lease Term
In general, the longer the lease term the more bargaining/negotiating power you have. This often means you can negotiate a price-cut on lease payments or other other fees. However, if you only have a 1 year lease agreement, you basically have no bargaining power and have to pay whatever is asked.
If your city/area has lots of vacant office space for lease, your potential for negotiating a cheaper lease payment is much higher. However, if office space is scarce due to popularity, you are going to pay more.
Interior vs. Exterior & Views
If you are not renting the whole floor of a building, then whether you have an exterior (with windows) or interior (no windows) office can also dramatically affect the price. If there is an interior office space option, it will probably be 10-15% cheaper (or sometimes even more) than an exterior space. When renting an exterior space the quality of the view will also play a factor.
Other Costs to Lease Office Space
In most cases, you will be required to pay charges on top of your monthly lease payment. In the office space business, these are generally referred to as Common Area Maintenance Charges (CAM).
Common Area Maintenance Charges (CAM) – Also a $’s/square foot charge
CAM charges are designed to cover the costs of the common areas of the building (lobby, elevators, hallways etc) as well as:
- Property Insurance – Check with Landlord or Broker for quote
- Property Taxes – Most listings show previous annual property taxes
- Utilities – Water, electric, heat, sewer, internet provider
- General Maintenance (Snow removal, lawn care, window washing, etc)
Landlords pay insurance, property taxes, utilities, and general maintenance costs for the whole building. They then take the sum total of the costs and divide them by the square footage of their building to get a per square foot price for CAM charges.
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Step 2: Figure Out How Much Space You Need
Knowing how much space you need will also really help narrow down your search for office property. Here is a calculator that should help you get a general estimate.
ar or two, do not forget to factor that into your potential space needs. Similarly, if you are planning on downsizing, do not get a huge office space. Otherwise, you will end up paying for space you are not using.
Step 3: Find 4-5 Quality Office Space Options
You do not want to limit yourself to one option right from the beginning. Instead, find 4-5 options that could work and then compare-and-contrast them to one another to determine the best fit.
Here are the best ways to locate property:
There is no substitute for local knowledge. That is why local brokers are still the top option for locating and leasing office space. In fact, one of the rookie mistakes of commercial real-estate leasing is trying to do it yourself. Hire a broker. They have invaluable expertise, knowledge, and connections that would take the average business owner years to gather.
A local broker should have an in-depth knowledge of your area, and might even have previous experience working with the landlord.
Find a Tenant Broker who has Office Leasing Experience
Loopnet.com is a site that specilizes in commercial real estate listings, and was consistantly mentioned by the experts we spoke to as a great option for finding retail properties.
To search available properties in your area, go to Loopnet.com, click the “advanced search link” and use the “for lease” tab to narrow down your options.
Loopnet.com Commercial Property Search
Co-Star is a popular subscription service used by commercial real estate brokers to locate office properties. It also provides in depth analysis of local commercial real estate markets. Co-Star costs from $300-$1000 per month, so it’s generally better to ask your commercial real estate broker to provide costar information rather than subscribing yourself.
Step 4. Select The Office Space That is Best For Your Business
Once you have located 4-5 quality options, you will go and visit each location with your broker to see what the space actually looks like in-person. The most important considerations when selecting your office space are cost, size, and location. Read our tips on How To Setup an Office The Fast And Efficient Way.
Since we have already touched on cost and size, let’s talk about location.
Here are some tips for picking the right office space location for your business.
Locate Near Employees/Workforce
Satisfying your employees and enabling them to do their best work for you is the main focus you should have when leasing office space. Considering this, you probably do not want to settle on an office space solution that is 40 minutes away from the majority of your employees when you have another option that is 10-15 minutes away.
Locate Near Public Transportation/Major Highways
This is going to vary quite a bit depending on your type of business. If you are a high-profile law firm, odds are your employees and clients are not going to take public transport. In this case, proximity to major highways is more important.
However, if you are providing general work-space for your employees in a city like New York where metro travel is huge, locating near a subway station could be very helpful to your employees.
Locate Near Business Specific Needs
If you are a litigation attorney who is consistently making trips to the courthouse, an office space located near the courthouse could save you lots of time and effort. Different businesses may have specific business needs. Know what yours are and find a space that accommodates those needs.
Locate Near Compatible Businesses
Having restaurants and cafes near your business can be a great asset. This is very
convenient for your employees. They can take a lunch break and get out of the office
without driving somewhere or feeling rushed for time.
Step 5: Negotiate Your Lease
Here are some tips and things to watch out for when negotiating your lease. For a more in depth explanation see our full article on lease terminology and negotiation as well as the 10 biggest mistakes to avoid when negotiating a commercial lease from Commercial-Real-Estate-Tucson.com:
Negotiate Your Lease
Here are some tips to help you navigate the lease-negotiation process successfully. See a more detailed list of tips as well as in-depth explanation of each of the tips below in our commercial real-estate article:
- Lease terms vary from state-to-state, but are often 1-5 years in duration.
- Use a commercial office space experienced attorney whenever possible. Leases are full of legal and technical jargon that you are going to want expert help in evaluating.
One place to find an attorney is Avvo. They have a service where you can ask general non-personalized questions for free.Click here to try it.
- Read the lease terms/contract carefully. It is important that you read through the lease contract very carefully. If there are parts you do not understand, have your attorney explain to you what they mean.
- Negotiate Build-in Clauses that Protect Your Business. There are certain clauses that can be included in your lease contract that will help protect your business. Here are three of the most common (See the Small Business Administration’s leasing guide)
- Sublease – A sublease clause gives you the option to sublease the space to another business.
- Exclusivity – An exclusivity clause prevents the landlord from leasing any other spaces on the premises to a direct competitor of yours.
- Co-Tenancy – Certain shopping centers have one major business that brings in the traffic. This is known as an anchor tenant. A Co-tenancy clause allows you to break your lease if an anchor tenant would happen to leave and the landlord did not replace the anchor tenant within a specified period of time.
- Make Sure the Contract Has Clear Expectations Concerning Building Occupation, Build-out Period, and Source of Truth. You need to know when you are supposed to move in, how much time you have to remodel the space (hopefully at a discounted rate or rent), and what document will be consulted to settle disputes between you and your landlord. These all should be clearly spelled out in the lease contract.
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Leasing office space is a fairly complicated process. If you follow the 5 steps outlined above you will be well on your way to finding and leasing the right office space for your business. If you have questions along the way just drop me a comment in the comments section below. I’m happy to help.
If you’re not sure a long lease is right for your business, don’t forget to check out WeWork. They can provide a variety of spaces for as long or short a time as you need, as well as most of the amenities required. Click here for more information.