How to Rent Office Space: What You Need to Know
One of the most important skills to know when moving your business is how to rent office space. The long-term financial ramifications, the short-term deal negotiating and the real-estate understanding are all very important aspects of running a profitable business.
How much you pay for your office space is one of the highest costs you can incur while running your business. You need to do everything in your power to control that cost. Finding the perfect space, negotiating the right price within a competitive New York environment, understanding all your build-out costs and exploring coworking and shared office spaces will help your find the right space.
Start Your Renting Process Early
As with making a residential move, you want to start as early as possible. When you get a jump on searching, pricing out options, learning about surrounding areas and amenities, you can gather plenty of data in order to make an informed decision. If you run a smaller company, allow at least 6-9 months for search, negotiating, contract signing and office build-out. With bigger businesses, you will need a minimum of 12-18 months in order to do it right. Finding a space in New York City is going to be you biggest challenge, except for coming to terms on a price, getting the deal done and customizing the space to your needs. The process is way more involved than you might imagine.
Now, there are exceptions. If you are a lean start-up, a one-person operation or some other very small, modern operation, you might want to investigate coworking spaces. Office space rental costs can be incredibly high in the city that never sleeps, so bringing down that line item could be a boon to your operating budget. There are many options throughout NYC. The cost can range from $350-$450 for a bare-bones, shared desk up to the $2000 for a private offices large enough to accommodate 4-8 people.
Of course, those options come with plenty of drawbacks compared with typical office spaces. Proceed cautiously.
Do Not Rent More Than You Need
Make sure you know what type of space you need, how much square footage you need for the length of the lease and how much you might grow and expand over the length of the lease. You don’t want to get stuck having to move to a larger space 2 years into a 5-year lease.
Do You Need a Broker?
In the commercial market, most brokers are paid by the landlord. In the super-cutthroat NYC market, brokers will be fighting each other for your business. Brokers can help you winnow down spaces before you trek out throughout the city. That way, you can only see spaces the really fit your needs. Use this to your advantage.
Tenant brokers are available, but you really need to make sure they are going to be worth it. A tenant broker will probably want to you sign exclusively, but you should resist that as much as possible. Only the best ones are going to be worth narrowing down your flexibility, doing the legwork necessary to find you a good spaces. Do your homework and you might not need a broker at all.
How Is Office Space Rent Calculated?
You are going to be quoted a price in square footage. Let’s look at an example. You see a space listed for 2,000 square feet. It is listed at $30 per square foot. That is $60,000 for the year. Divide that $60K by 12 for your monthly rent: $5,000.
Hold on. What you might not understand is that you are not actually renting a 2,00-square foot space. Let’s take a look at the usable or rentable space. That is actually around 1500 square feet, due to the loss factor. Landlords calculate square footage with common areas, interior and exterior walls and other things in mind, which accounts for the loss factor. The reason you are getting charged for space that you cannot really use is they need to account for wear and tear and use of the common areas of the building, like the lobby and restrooms.
And we are not done yet. Utilities are next. For smaller spaces, landlords are going have you on a “plus electric” plan, which means you pay the regular monthly rent, plus a set price for electric usages. Other buildings/landlords can offer a sub-metered plan, where they have access to the readings and charge you plus an administrative fee and a direct-meter plan, where you have access to the meter and deal with the electric company directly. Usually, that is the most economic plan, because it gives you the most control.
Then we move on to general utilities, where you kick in for your share of water, sewer, garbage collection, etc. Most of the time, that is bundled into one fee that your landlord tacks on to the rent.
Building Class 101
Generally, office space rental costs are focused on how many people you are going to fit into your space and how many desks you need. Then there is the matter of image. How potential investors and clients see your company. That is where building class comes in. NYC has Building Classes of A, B and C. This is an important step when learning how to rent office space.
- Class A buildings are top of the heap, with amenities like 24-hour doormen, enhanced security and are almost always built after the 1960s. Think any gleaming skyscraper that you see in iconic images of New York. Obviously, they are the most expensive per square foot.
- Class B buildings tend to be older, but updated and modernized to a certain extent. They are step down in price and tend to be in less showy locations.
- Class C means you are in the least desirable, most rundown parts of the city. If you are in this market, you might want to explore coworking spaces.
Know Your Buildout
If you are going to need to do a lot of customizing in the space, have your contractor or architect in on the process from the get-go. They will be able to advise you on all sorts of issues and potential roadblocks that you may never see coming. And be sure to understand what kind of restrictions and costs your landlord might impose on building out the space.
Focus on the Future
You may not be thinking about the issues surrounding renewing the lease 3-5 years from now, but it deserves special attention. Be sure that the agreement addresses how far out you need to make the renewal decision and gives you flexibility when negotiating fair market value with the landlord when the time comes.
Watch Out for Escalation Clauses
The agreement might include a provision for the landlord to tack on an increase for operating expense escalation or other situations that change over time. Make your landlord spell out specific situations where escalations could apply and fight for a cap on operating expense-related rent increases.
Keep an Eye on Property Taxes
Landlords might include a provision that ups your rent in their property taxes go up. Be sure to scrutinize that part of the agreement hard to prevent getting taken advantage of.
How to Negotiate
Retain your own team of specialists, rather than dealing directing with the landlord’s agent (on the rental agreement) or the building architect (on the buildout). Those individuals have other priorities than getting you a good deal. The landlord’s agent has a fiduciary responsibility to their client. Having your own team will protect you from unnecessary clauses and a burdensome monthly rent.
Press your advantage and push for things that are unlikely, but that you can trade down the line. Push for complete control or the sublet and 100% of the profit from allowing a renter down the line in your lease. You won’t get it, but you can give it back for a break on overhang which means that you can keep your rent down if you have to go past the end date of your lease.
Lastly, don’t be afraid of signing a long lease, as long as you have the proper protections in place. You will most likely get a better deal, as long as you incorporate, you can protect yourself if the company goes under and your broker will be more motivated, since they get more money the longer that the deal is.