Whether you’re starting out or expanding your small business, you’ll need to find an office space to operate out of. The price of renting and the costs that are associated with leasing an office space can be intimidating but, with a little research, we can help you estimate how much you can expect to pay.
We’ll also go over the commercial rental process, giving you everything you need to know to find, evaluate and negotiate a lease for your office space.
Advantages and Disadvantages of Renting Office Space
Before diving into the numbers, it’s worth considering whether renting is the right option for you.
For some business owners, securing a loan and buying commercial real estate is a better choice. Depending on your industry, you may even need to own land and buildings to house your operations. Also, having equity in real estate can be a financial benefit if you were thinking about selling in the future. Flexibility is another benefit, as you can always move and will have no lease to break.
On the other hand, renting has many advantages. First and foremost, it’s less expensive. Mortgages typically have higher price tags, and many rental agreements don’t require tenants to pay for property taxes and other costs associated with owning property. You also save time and money on maintenance, leaving that to the owner.
There’s also an added level of flexibility in finding the right spot for you. If you’re a small retail shop, for example, you can find standalone buildings and spaces in strip malls that fit your needs but would be unattainable if you needed to buy the whole structure.
If you’ve decided renting is the right option for your small business, it’s time to take some steps to evaluate the costs and what you need to find the perfect fit.
What Goes Into the Cost of Renting an Office Space?
Average costs for renting a commercial office space vary greatly based on your location and the structure itself.
Here are three main types of lease contracts:
- Full Service: Most desirable. Landlord pays for all expenses outside of rent
- Net: Tenant pays the rent and a portion of taxes, insurance and maintenance
- Triple Net: Tenant pays the rent and all of the taxes, insurance and maintenance
Depending upon what type of lease you and your landlord draw up, your rent could go up significantly. Your monthly payment will be based on what you negotiate but will consist of a few main parts.
The main chunk of your monthly price will, of course, be the base rent. This number is calculated yearly by multiplying the value of the property by the square footage. An example would look like this:
1,200 square feet
$50 X 1,200 sq. ft = $60,000 per year
The value of the property goes up based on location, customer traffic and which class of office building it’s labeled as:
Generally, the newest, highest-quality buildings. Class-A structures are well-maintained and house high profile tenants.
Older Class-A buildings with the potential to be restored. Purpose-made Class B structures are explicitly made to provide quality office space at a lower price.
Older structures in less-desirable areas that usually require renovations. Some 10- to 15-year-old Class A and 5- to 10-year-old Class B structures can be listed and priced as Class C.
Common Area Maintenance (CAM)
When you rent an office space, CAM costs may be rolled into your monthly payment. These are costs that the landlord incurs to take care of the property. Some examples include maintenance of the parking lot, lighting and landscaping. They can be up to 30-percent of your total lease amount, depending on the building’s class and amenities.
Don’t forget about the cost of water, gas and electric. Unlike many residential lease agreements, commercial landlords generally don’t pay for any of the utilities. With the average cost of electricity alone for a small business being over $650 a month, forgetting to include the utilities when estimating your finances can leave you scrambling to cut the budget elsewhere.
Property Taxes and Insurance
Depending on your landlord and the type of lease you have, you could pay your portion—if in a shared space—or all of the property taxes and insurance on your office space. These additional costs can amount to hundreds or thousands of dollars over time, so make sure you’re aware of how much they can impact your monthly payment.
Estimate Your Office Space Rental Budget
Before you go out and make any offers, you must figure out how much you should spend. Considering the money you make now, what you hope to make and your current and future needs can help you decide what property makes the most sense for your small business.
How Much Can You Afford?
The first step is calculating, realistically, what you can afford. You could find the perfect office space to rent, but will only be kidding yourself if you can’t pay for it. A general rule of thumb is to spend between 5- and 15-percent of your revenue on rent. This can vary depending on your small business’s industry and unique situation, but try not to go any higher than that.
To find the right number for your revenue, look over financial documents such as your profit and loss statements and balance sheets. We recommend going back a few years if you can. If you’re just starting up, research your industry and location to give yourself the best estimate. Figure out your expected revenue to find a range of prices that work with what you can afford before evaluating what you want in a new space.
Finding the Right Office Space for Your Needs
After setting a limit on what you can afford, let’s look at what you need. The square footage, amenities and location you desire will drive the rental cost of an office space.
Choosing the Right Size
It’s important to take into account how big of a property you’ll actually require. Square footage is one of the biggest determining factors in your monthly rent. On average, you’ll want your small business office space to be around 125- to 225-square feet per employee. Depending on your industry, that number could be on the lower- or upper-end of that spectrum.
The number you come up with here will be how your rent is laid out when you negotiate a leasing agreement. For example, your potential landlord could set the rent at $50 per square foot. The number itself is based on many factors, but the size you need has a direct correlation to how much you’ll pay for your space.
Layout and Amenities
Consider the office space’s layout, as well. If you need larger conference rooms, open floor plans for cubicles or dedicated work areas, you’ll have to find a place with the right dimensions.
If you’re a retail business with excess inventory, make sure to take into consideration whether there’s a dedicated area that would work for storage.
Sometimes it’s easy to forget about parking and security, but they’re important as well. If you have a shared lot with other small businesses, consider how that’ll affect both your employees and customers. If there’s a shared or dedicated security system in place within the space itself, make sure you’re comfortable with it before trusting that your employees and equipment are safe.
Location, Location, Location
Location will drastically change the average cost of renting an office space for your small business. For example, setting up shop in a high-traffic area in Palo Alto, CA could cost you $120 per square foot each year. Move a few miles down the road, however, and a similar building could cost less than half of that.
Finding a high-traffic area will do wonders for bringing in customers, as well. Areas with a high concentration of your target demographic and low saturation of competitors are ideal but hard to find. And you’ll pay a premium for that traffic. Similarly, being close to busy roads and dense pedestrian areas will bloat rent prices. Conduct your market research and try to identify the optimal location for your small business.
Make sure to do your due diligence when trying to find a rental for your small business. Picture the right balance of size, amenities, location and price to narrow down your search.
Identifying Your Perfect Rental Space
Use what you now know about office rental costs and your needs to start your search. Online commercial real estate sites like LoopNet and Showcase list thousands of available properties per year and are a great resource for your initial search.
Try to find the average cost for the size and area you would ideally like for your office space. Identify properties on the high- and low-end of your price range and try to base your search somewhere in the middle.
If you’ve already calculated how much you can afford, you can see how much room you have to move up or down to balance desirability and affordability. It may turn out that you can afford to move downtown where there is a lot of consumer traffic for your small business. Remember to include room for business growth, but also the added expense if the landlord requires you to sign a triple-net lease.
Apply for and Negotiate Your New Lease
After you’ve done some research, estimated your costs and found potential fits, you can get ready to apply for a lease. Compile all of your financial statements, credit reports and references from previous landlords. These documents allow potential landlords to judge your creditworthiness and approve you to move into their commercial property.
Many small business owners opt to use tenant brokers, who work as an intermediary between you and the landlord. They may have expert knowledge in your area and can save you time and money by vetting and negotiating with landlords.
If you decide to go at it alone, be wary. Other than negotiating terms for the average rent cost, landlords may try to include unexpected clauses that can prove costly down the road. Among other things, make sure to confirm if rent is subject to inflation, if you’re in charge of any maintenance and if you’re able to sublease the property if you need to move.
There you have it: everything you need to understand the average costs and details involved with finding a rental office space. Now, it’s time to make some offers and seal the deal on your small business’s next home.