Once you have the rentable square feet you can begin to understand the economics of a solution. Rent including operating costs, is quoted on a rentable and/or a useable square foot basis and all other costs can be reduced to those categories as well. Once you are clearly seeing costs, you can then begin to compare options to one another logically. For example, a classic approach to quoting rent and tenant improvement allowances is to say: I will rent you space at $30.00 per rentable square foot annually and provide you a tenant improvement allowance of $30.00 per useable square foot. Once you realize that the two measurements are not the same and useable is always less by up to 20%, you may not think the deal is so great once you get a construction bid of $40 per rentable square foot. My job is to sort these things out for my clients, but if you are doing this on your own or with a broker, stay focused on the useable and rentable square feet when discussing economics.
Ultimately, I like to look at spaces from a number of different financial perspectives:
- Cost per rentable/useable square foot annually
- Total per rentable/useable square foot annually
- Total cost over the term
- Present Value over the term
- Average net effective rent over the term
The key points are that you can’t make these calculations without having an accurate square foot basis to start with and organizing cash flows. At this point the numbers still mean nothing if you don’t know for certain that your space requirements are met.
So, if office broker number 1 tells you that they have 20,000 useable square feet available at $35.00 per square foot and broker number 2, tells you they have 26,000 rentable square feet available at $26.92 per square foot, you would know that both spaces on face value should cost roughly the same amount annually. What you don’t know is if the spaces will meet your space plan needs.
While it appears to be sophisticated to ask for clarifications on rentable/useable ratios, or the “load factor”, what matters most is that while the square foot numbers vary, the projected costs are identical on first glance. When I walk a space, it is easy to size up efficiency after years of working with planners and knowing what to look for:
- Large and irregular columns within a potential space
- Bay depths that are too deep or too shallow to meet the design approach that meets a particular user type (law firms verus call centers, etc.)
- Odd shapes like triangles, sharp radius curves
- Jagged exterior walls
- Odd or overly large building cores for elevators, toilet rooms, utility rooms
- Emergency stair well configurations on the floor
More often than not, the initial inspection of options with square foot calculations and basic financial information in hand, the list of options that are worth pursuing for a specific user gets shortened considerably. My advice is to avoid space planning sessions while touring, spend your time focusing on big picture items and rely on a professional to help you determine if a space has hidden potential that would create an extraordinary value to your business , or create a costly and complicated challenge that is better to avoid.
As spaces get larger and the solutions get more complex with more people and functions, accuracy and surety that an option will work, become more important. Interestingly enough, based on my experience, instead of leasing too little space, most companies lease substantially more space than they need because they don’t take the time to define space needs before jumping into the market. So that larger space that is less efficient but cheaper, could be a gem or a dog, my job is to help clients determine just what they are looking at.