How much office space should I REALLY lease?

Leasing too much (or too little) office space can be a costly mistake, however determining exactly how much space you require is one component of the leasing process that is often rushed or inaccurate.

Unfortunately, our industry is partially to blame for this.  Tenants often think they need more space than they actually do, and since a broker earns more when you lease more, they may be the last person to tell you that you could scale back.

Taking the time to identify the size, configuration and quantity of each element of your new office will not only save you time and money down the road, but chances are you’ll find that you require less space than you originally thought you did.

Old rules of thumb such as, “tech tenants require 150 square feet per employee, and law firms require 350” is an unreliable measure and nothing more than an insightful metric for spotting a gross irregularity; there are far too many variables involved in determining your space requirement to simplify it in this way.

A better and more accurate solution is to take an analytical approach by using a tried and true Excel spreadsheet.

First, calculate the quantity and size of all your desired offices, cubes, conference rooms and supporting spaces such as kitchens, server rooms, storage closets, reception area so as to arrive at your Net Square Footage.

Then factor the following into your spreadsheet as they’ll substantially affect your true space requirement.

  • Circulation Factor – this is simply “the space between” and takes into account all the interior space that hasn’t yet been accounted for such as hallways and walkways between cubes.
  • Load Factor – Buildings add a percentage on top of the actual square footage of your office to account for common areas such as lobbies, restrooms and hallways.  This is the difference between the Useable Square Footage (USF) and Rentable Square Footage (RSF). Properties can vary greatly in how efficient they are, and a good broker will not overlook this important factor.

Finally, this exercise will yield an accurate square footage of what you require today, but what about in the future?  Take time to consider factors that will affect your space requirement throughout the term of your lease such as hiring or consolidation, planned mergers and acquisitions and changing in funding schedules.

When is the Best Time to Renew an Office Lease?

There’s a bit of alchemy involved when concocting a recipe for the Perfect Renewal.  Factors such as the tenant’s size and credit worthiness, how much term is remaining on the lease, and the landlord’s position within the context of the overall market all play a key role in determining the best renewal strategy.

One of the first things to consider is the general direction the real estate leasing market is heading, from both a macro and  micro level.  Base rental rates typically escalate annually between 2.5-5% when you’re locked into a lease, therefore if market rents are outpacing that rate and will be for the foreseeable future, then a longer lease such as 5-7 years is advisable, from the tenant’s perspective.  If however rents are falling, then negotiating the shortest term possible (without forfeiting rights that would cause you to lose the space altogether) will allow you to renegotiate better and better terms until the cycle again finds the bottom.  This strategy runs counter to the landlord’s goals, however, as rental rate reductions cut into their bottom line.  The tenant’s broker must then identify other ways their client’s tenancy can benefit the landlord, and be able to effectively articulate and negotiate using them.

Many factors will play a role as to how far in advance of the lease expiration the tenant’s real estate advisor should begin dialogue with their client’s landlord, but the single most important factor is that there is enough time to locate, negotiate, and relocate to another competing property, even if the tenant’s goal is to simply stay and renew.  Commercial leasing is a business, and the tenant is the landlord’s customer who will pay a substantial amount of rent, over time.  It is only fair, then, that the tenant’s potential new transaction be brought to the open market where other landlords can compete for their business.

Fear of Loss is a powerful thing, and by touring the market and viewing alternative properties and perhaps even accepting unsolicited proposals from other buildings, the tenant’s landlord knows they must put their best offer forward or lose an income stream to another property.

There are of course many, many other factors that a tenant should consider when timing their renewal; tenant movement within the building, the landlord’s current fiscal position, and even competing landlords’ aggressiveness to “make deals”  (a landlord in the Jack London Square submarket of Oakland, California recently lured a 40k square foot tenant to relocate a year in advance of their expiration by offering them a full year of free rent).  Early renewals well in advance of the contract expiration are also typically achievable using a “Blend and Extend” strategy.

What’s most important is that the tenant hires the right commercial real estate advisor who knows the market cold, and does not underestimate the time required to implement a full real estate process so as to yield the absolute best terms possible.

See also:  Should I Hire a Real Estate Advisor When Renewing My Lease?