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“The code is more what you call guidelines than actual rules.” – Captain Barbosa explaining the Pirates Code  Like the Pirates code, asking rents are guidelines that landlords and their brokers give tenants as a customary starting point for rent negotiation. But don’t confuse asking rent guidelines with reality.
On March 17, 2020, San Francisco issued a stay-at-home order. According to CoStar, average office asking rents on that date in the San Francisco metro market were $64.55/RSF and total availability was near market equilibrium at 9.9%. Three years later, San Francisco has the highest sublease availability rate in the country. On St. Patrick’s Day 2023, market uncertainty caused by the pandemic had more than doubled total availability to a staggering 23.7%. In the slow recovery from the pandemic San Francisco, with a large population of work-from-anywhere friendly companies, sits at the bottom of major metros nationwide in return-to-office rates. That, together with tenants moving to cheaper markets translates to lower demand for office space now, and potentially fewer office workers in the future. Yet, contrary to the market reality caused by the pandemic, landlords have held on tightly to pre-COVID asking rents. On March 17, 2023, asking rents in the San Francisco metro market were down only 4.7% from the stay-at-home order of 2020 to $61.50/RSF. The Market Reality For the first time in a decade, tenants have gained negotiating leverage created by two years of pandemic. As tenant representatives we work exclusively with tenants. Never landlords. We recently negotiated a $32.00/RSF direct lease for Class B office space in San Francisco that had a 2020 starting rent of $56.00/RSF. Now, a 42.9% drop in negotiated rent from pre-pandemic may be an outlier but unlike some San Francisco asking rents, it’s to be believed. Why are Asking Rents out of sync with Market Reality? One of the dirty little secrets of the commercial real estate industry is that most big national brokerages represent both landlords and tenants. It is in the best interest of the brokers representing landlords to keep perceived rental rates as high as possible. Like the Pirates code, these asking rents are guidelines that aren’t to be trusted. Brokers that specialize in tenant representation are only focused on finding value and multiple alternatives for their clients. Properties with unrealistic asking rents tend to come in with higher rent proposals than equal and comparable buildings. Fortunately, some San Francisco landlords are starting to break ranks with their peers and are setting more realistic asking rents. If you find a landlord looking to gouge you on rent before a lease is negotiated, consider yourself lucky to have identified the bad news early. Then, move on to a more realistic alternative.  Whether you are right-sizing or downsizing your office space to support a hybrid working model, there is no easy answer for how much space you’ll need. If we’ve learned nothing else from the pandemic, it’s that we can’t predict the future. An office that supports hybrid working should allow for the flexibility to adapt and change as your needs evolve.
It might feel tempting to downsize your square footage to support a hybrid workforce but downsizing and right-sizing are not the same things. Hybrid Workspace Guidelines Prior to the pandemic, open design had replaced cube farms which years ago replaced enclosed large office designs. Companies pivoting to hybrid working models are faced with modifying their open office designs to support more collaborative and flexible workspaces. A recent HqO report forecasts that by 2025, the need for corporate workspace will flip from 70% individual workstations and 30% collaborative space to 30% individual and 70% collaborative space. The hybrid office design will transition existing office space to flexible desk layouts and hot-desking areas, lounge areas, and meeting rooms designed for videoconferencing with remote working staff, clients, and partners. Large conference rooms are like dinosaurs in the hybrid office and are being swapped out for more sensible alternatives such as Zoom rooms, huddle rooms, phone booths, and private workspaces that can be made available on an hourly or daily basis. But that doesn't necessarily mean less space. Average Square Footage Approach Prior to the pandemic, organizations would multiply the number of employees by the rule of thumb needed per individual to estimate how large their offices should be. But this calculation no longer works. Today, you may only have 30% of your staff in the office at a given time. A simple 1:1 ratio of desks or square footage per employee is no longer a useful calculation for hybrid office space needs. Space Allocation Approach The Space Allocation Approach is based on how space is used and is more suitable to help estimate the amount of “usable” office space required for your hybrid workspace. Each organization will require a unique blend of these collaborative and individual space elements to support their hybrid working model.
Note: Any common area load factors (typically between 10% and 20%) will need to be added on to determine the "rentable" area. The Pirates Code Estimate your office space size requirement by the Space Allocation Approach. Then, make sure that you are accounting for planned growth. Make headcount projections for the expected term of the lease. Then, lease space so that around 2/3 or 3/4 of the way through the term you start reaching the occupancy limit. Keep in mind that no two spaces are alike. Look for spaces that are more efficient, like rectangular spaces versus angled corners of a building. No two spaces with the same rentable square footage are the same. Load factor, floor plan and layout matter. These space allocations are mere guidelines. While there are definitive trends in hybrid office design, every organization is different, and you will need to determine the best mix of flexible spaces, collaborative spaces, and private workspaces for your needs. “The code is more what you’d call ‘guidelines’ than actual rules.” – Barbossa, Pirates of the Caribbean #cre #commercialrealestate #hybridworkspace  Everyone knows someone in commercial real estate. It may be their kid’s little league coach, college roommate, neighbor, relative or someone they sit next to on the commute train. And often, that’s who people work with for their first few office leases. Commercial real estate is a “relationship” business so tenants tend to work with brokers they know. Makes sense.
Until it doesn’t. More than 90% of the commercial real estate brokers represent both landlords AND tenants. This creates a built-in conflict of interest that few tenants understand and even fewer brokers discuss. No one would hire a lawyer who works for the other side. Yet, the equivalent happens every day when tenants work with commercial real estate brokers and firms that also represent landlords. So, ask the broker that coaches your kid’s little league team if they or anyone else in their office represents landlords. If so, you have a built-in conflict of interest. This conflict manifests itself in many ways. For example, if you find you are getting a worse deal on your lease renewal than new tenants in your building, this is a red flag. Landlords (and the brokers that represent them) know that ~70% of tenants will renew their leases. If you don’t put your landlord on notice that you are considering other options, you’ve lost the negotiating leverage that a new tenant would have. Thoroughly researching your options will give you a Plan B in case you aren’t able to work out an agreement with your current landlord. There is no negotiation leverage if you aren’t willing to relocate. So, treating your renewal exactly as you would relocation will give you the negotiating leverage that a new tenant would have. When your broker suggests asking your landlord for a renewal proposal without first creating leverage for you by getting market proposals, you either have an underperforming broker or a broker with a conflict of interest. It is in the best interest of brokers that represent landlords to keep perceived asking rates as high as possible and vacancy rates as low as possible. Firms that specialize in tenant representation are only focused on finding value and multiple alternatives for their clients. If your broker isn’t finding you multiple alternatives, then you either have an underperforming broker or a broker with a conflict of interest. You may determine that its time to make a change but sometimes its harder and more awkward to cut a poor player that has been on the team for a few seasons than to play the new kid over him. This applies to little league and applies to commercial real estate. Except, do you really want to run your business like a little league team?  As tenant representatives we are often asked by our clients what the difference is between a Request for Proposal (RFP) and a Letter of Intent (LOI).
Reduce Misunderstandings The RFP and LOI are very similar in that both are merely a discussion of some of the business terms and conditions that a tenant and landlord will need to reach agreement on in advance of executing a commercial lease agreement. The terms and conditions may include but not be limited to:
Maximize Negotiating Leverage RFPs are submitted by tenant brokers on behalf of tenants and are often presented in the earlier stages of lease negotiations. LOIs tend to be submitted or exchanged by either tenants or landlords and their brokers closer to final lease negotiation. It is not uncommon for a tenant broker to submit an RFP to a landlord, and the listing broker to respond by presenting an LOI as their response. The most significant difference is that a Request for Proposal is a signal from the tenant to the landlord you are considering multiple alternatives and are asking them to put forth their best offer. Submitting RFPs and getting proposals from a select few number of buildings will give you an “apples-to-apples” comparison of alternatives and help you negotiate the most competitive terms and conditions possible with the landlord. There is no negotiation leverage without options and the ability to walk. Unlike the RFP, when a tenant initiates a Letter of Intent, it is a declaration that the tenant intends to enter into a lease with the landlord for their specific premises. Landlords know that nearly all tenants that initiate lease negotiations by submitting a Letter of Intent have vetted their short list and will end up leasing their space. As tenant representatives we represent commercial tenants only. Never landlords. We utilize RFPs to develop a Plan B in case we are unable to work out an agreement with the landlord. If you don’t put landlords on notice that you are considering other options by submitting a Request for Proposal, you’ve lost the ability to maximize your negotiating leverage.  How a Market’s Greatest Strength became its Greatest Weakness
San Francisco’s proactive approach in the 2010s to luring companies away from Silicon Valley established the City as the new epicenter for the tech economy. Talent is the fuel for growth and young tech talent preferred working and living in the City. Companies with offices in San Francisco gained an important recruiting and retention advantage over those without. As a result, demand for office space in San Francisco was driven to new heights by tech companies in a decade long tech expansion cycle. Prior to 2010 the City’s Financial District was historically tenanted by traditional businesses, professional service institutions, and Fortune 500 firms that were attracted to the large inventory of high-rise, Class A properties. Over the past decade tech firms and coworking space providers gradually expanded into the Financial District which more than doubled rents creating one of the country’s most expensive submarkets. As a result, many of the City’s traditional businesses and institutions were squeezed out of the Financial District. Then, on March 17, 2020, San Francisco issued a stay-at-home order. According to CoStar, daily asking rents on that date in the Financial District submarket were $74.59/RSF and vacancy was very tight at 6.5%. Two years later, San Francisco had the highest sublease availability rate in the country. On St. Patrick’s Day 2022, market uncertainty caused by the pandemic had tripled vacancy in the Financial District to a staggering 19.8% and had driven down asking rents to $59.20/RSF. In the slow recovery from the pandemic San Francisco, with a large population of work-from-anywhere friendly companies, sits at the bottom of major metros nationwide in return-to-office rates. The energy that attracted tech firm employees to working and living in the City became the very thing that employees of work-from-anywhere companies now want to avoid. In the midst of pandemic uncertainty, tech tenants began subleasing or giving back space while traditional businesses moved to cheaper markets creating lower demand for office space now, and potentially fewer office workers in the future. Take a Step up in Class without a Step up in Cost For the first time in a decade, tenants that were previously priced out of the highest quality spaces have gained negotiating leverage created by two years of pandemic. Office space with modern amenities in transit friendly locations can act as a catalyst for return-to-office initiatives as well as a competitive advantage for recruiting new talent. As tenant representatives we work exclusively with tenants. Never landlords. We recently negotiated a direct lease for office space in San Francisco that was 42.9% below the 2020 starting rent for the same space. Now, a 42.9% drop in negotiated rent from pre-pandemic may be an outlier but it signals a shift in negotiating leverage from landlords to tenants. Office tenants are finding landlords offering a large palette of concessions to make a lease more enticing. These most often take the form of free rent, deferred or reduced escalations, and tenant improvement allowances but may also include free parking, reduced security deposit, OPEX caps, and consent to sublease. Despite the pandemic, talent remains the fuel for viability and growth. While some tech firms with work-from-anywhere policies struggle with the uncertainty around their need for office space, traditional businesses that want their employees to work from a central location can take advantage of the staggering vacancy rate and return to the Financial District while benefitting from a step up in class without a step up in cost.  If you are reading this, you are likely just starting the process of leasing commercial real estate.
Many people start the process by asking Siri, Alexa, or Google to get an overview of the market. There is nothing wrong with that. But the results are not comprehensive, include paid advertising listings, lack key information, and don't represent the true market conditions. You may decide to reach out to each broker from the search results with listings that roughly meet your criteria. If so, you'll find that interacting with multiple brokers to request asking rents, flyers and current floor plans for each of the alternatives can be time consuming. Avoid Conflict of Interest Maybe you know someone in real estate that can help you vet the alternatives and even pre-tour to confirm the fit before you start to tour. Everyone does. It may be your kid’s little league coach, college roommate, neighbor, relative or someone you sit next to on the commute train. Commercial real estate is a “relationship” business, so people tend to work with brokers they know. Makes sense. Until it doesn’t. More than 90% of commercial real estate firms represent both landlords and tenants. This creates a built-in conflict of interest that few tenants understand, and even fewer brokers discuss. No one would hire a lawyer who works for the other side. Yet, the equivalent happens every day when tenants work with commercial real estate brokers and firms that also represent landlords. So, ask your broker if they or anyone else in their office represents landlords. If so, you have a built-in conflict of interest. At CroninCRE we work exclusively as representatives of tenants without conflict of interest. Every opportunity in the market will be researched and presented to you. We are only focused on finding value and multiple alternatives, many of which aren't found by asking Siri, Alexa, or Google. Why sign a Tenant Representation Agreement? Once you select a tenant broker to start looking for commercial real estate, they will likely request that you sign a Tenant Representation Agreement. So, why sign it? A written agreement is the most appropriate and legally safe way to create an agency relationship. Even though tenant representatives like CroninCRE are typically paid by the landlord, they have a fiduciary duty to represent your needs in everything they do. The agreement establishes the fiduciary relationship in writing. Simply put, the Tenant Representation Agreement means there are no other brokers working with you for this transaction. Before a tenant broker begins the search process below, they want to be assured that they are going to be compensated for dedicating their time and attention to creating multiple alternatives for you.
You couldn’t stay in business if you worked for free all day. The Tenant Representation Agreement makes sure your tenant representative is compensated. Without an agreement you don’t really have someone on your side. If your broker isn’t asking you to sign a Tenant Representation Agreement, you may have a broker with a conflict of interest.  Many office Tenants focus on the first year “Base Rent” when evaluating their cost of occupancy. Or, as Tenants consider alternatives, they compare the “Rental Rate” per month or year between competing alternatives. However, negotiating the lowest Base Rent doesn’t always guarantee the lowest cost of occupancy. There are many other factors that contribute to calculating the total cost of occupancy.
Calculating Base Rent Tenants tend to look at space requirements in terms of the actual and exclusive space they require inside a suite to conduct business. In commercial real estate terminology this is known as “Usable Square Footage”. However, Usable Square Footage (USF) does not include common areas of a building such as lobbies, shared restrooms, stairwells, storage rooms, and shared hallways. To account for these common areas Landlords add-on a “Load Factor” to the Usable Square Footage to arrive at “Rentable Square Footage”. Load Factor (LF) varies between buildings but commonly ranges between 10% and 20%. If you require a set certain amount of Usable Square Footage, understand that not all office spaces with the same Rentable Square Footage (RSF) include the same amount of usable space that you may require to conduct business. The formula Landlords use to calculate your Base Rent looks like this:
What’s Included in Base Rent? Most leases in multi-tenant office buildings are “Full-Service” or “Gross”, typically defined as a lease that has one, all-inclusive Rental Rate which includes both the base lease rate and the building standard services which are paid by the Landlord combined into one figure. In Full-Service (FS) and Gross Leases, specified operating expenses “pass through” from the Landlord to the Tenant. These expenses can include any combination of property taxes, insurance, and common area maintenance (CAM). The operating expense amount for the “Base Year” (typically the year of lease commencement or the first calendar year of tenancy) is the maximum amount of expenses the owner will pay over the life of the lease per year. Any expenses over the Base Year amount are passed through to the Tenant in addition to the Base Rent. In California, buildings that have been owned by the same entities for a long period of time carry a large property tax liability for Tenants. Buildings like these may not have been reassessed at market value for years and in some cases decades. Proposition 13 currently limits property tax reassessments (increases) to 2% annually but allows for full tax reassessments if the building is sold, more than 50% is transferred, or substantial new construction is completed. If a transfer occurs during the lease term, these property tax increases are passed through from the Landlord to the Tenant. It is important to consider that two alternatives with the same negotiated Base Rent may not be the same when you factor in property tax liability and the potential impact on the total cost of occupancy. Escalation Clause It is common practice for Landlords to include an escalation clause in the lease which increases the rate of rent over the term of the lease, usually on an annual basis. The most frequently used types of escalations are Fixed Percent (%), Monetary ($/sf), and Index (CPI). Most leases with a term longer than one year will have escalation. While most tenants want to focus on the first year Base Rent, negotiating a lower escalation clause can have a significant impact on the total cost of occupancy on a long-term lease. The larger the Rentable Square Footage and the longer the lease term, the greater impact the escalation clause will have on the total cost of occupancy. Concessions Landlords offer concessions to a tenant to make a lease more enticing. These most often take the form of free rent and tenant improvement allowances but may also include free parking, reduced security deposit, and/or consent to sublease. When Landlords offer free rent, it may not actually be free. It's common for Landlords to add the free rent to the end of the lease term which would make a sixty-month lease with three free months a sixty-three-month lease. And, with an escalation clause the Base Rent in months sixty-one, -two, -three will be higher than the initial three months of free rent. Calculating Total Cost of Occupancy It’s natural for Tenants to focus on the Rental Rate when evaluating their alternatives but as we’ve pointed out there are important other factors that contribute to the total cost of occupancy. The calculation of total occupancy cost is the Base Rent paid by a Tenant over the lease term, adjusted downward for financial concessions paid by the Landlord (such as free rent), and upward for rent escalations and costs that are paid by the Tenant (such as operating expense pass-throughs). The most effective way to negotiate the lowest cost of occupancy is to hire a broker that exclusively represents Tenants. Why? Because Landlords are focused and experienced negotiators. Landlords that deal directly with a Tenant knows the Tenant may overlook or underestimate the importance of concessions, escalations, and pass-throughs. Like Landlords, Tenant representatives are experienced in complex lease negotiations. But unlike Landlords, Tenant representatives have a fiduciary duty to solely represent your needs. Finding the right retail, office, or industrial space can be an exciting challenge for a business. Once you've made the decision to lease space, you’ll encounter a commercial real estate terminology that can be quite confusing.
Your tenant representative and real estate attorney will guide you and explain unfamiliar terminology, but these are terms that are helpful to know. A Asking Rent: This represents the rental rate offered by the landlord per rentable square foot (RSF), per year (RSF/YR) for lease. It is sometimes represented as a monthly (RSF/MO) amount depending on the local market custom. Asking Rent is the starting point of a rental rate negotiation. B Base Rent: The minimum or fixed amount of rent paid in a commercial lease before escalations, pass through expenses or other charges. Base Rent is determined by multiplying the total Rentable Square Footage (RSF) by the Rental Rate. Base Year: In many Full-Service and Gross Leases the tenant is responsible for paying their pro-rata share of the property taxes, insurance and common area maintenance (CAM) as part of their lease agreement. The “Base Year” is the year that is tied to the actual amount of the expenses to run the property in a specified year. In a new lease, the Base Year is typically negotiated to be either the year of lease commencement or the first calendar year of tenancy. The expense amount for the Base Year is the maximum amount of expenses the owner will pay over the life of the lease per year and any expenses over the Base Year amount will be passed through to the tenant in addition to the rent. BOMA Standard: The Building Owners and Managers Association (BOMA) provides guidelines on how a commercial office building or specific suite should be measured. Most office leases reference BOMA measurement standards within the lease language as a standard for measurements. Building Class: Office buildings are differentiated by Class A, B, or C depending on a combination of geographical and physical characteristics. These classifications are very subjective and vary widely. Building Class is best used as a mere guideline when considering available space alternatives in a specific submarket. C Commencement Letter: A letter that codifies when the lease term and the benefits of the lease began (Lease Commencement Date). Since the Lease Commencement Date starts the clock on the term of the lease and establishes the Expiration Date, a Commencement Letter should be executed by both parties. Common Area: The portions of the building or project that are outside your suite and available for use by all tenants or occupants on a non-exclusive basis such as lobbies, shared restrooms, stairwells, storage rooms, and shared hallways, etc.. Common Area Maintenance (CAM): In a typical office lease the costs for utilities, cleaning and maintenance of the building's common areas that landlords pass through to their tenants. However, there is no industry standard on what exactly CAM charges include and as a result are almost never the same from one building or landlord or lease to another. CAM charges should be defined in your lease so there is no confusion as to what costs are included and excluded. Concession: An incentive given to a tenant by a landlord to make a lease more enticing. These most often take the form of free rent and tenant improvement allowances but may also include free parking, reduced security deposit, and/or consent to sublease. D Direct Space: When you rent office space directly from the landlord of the building as opposed to renting space being offered by another tenant subletting a space that has already been leased. Since you're negotiating directly with the landlord you may be able to gain more concessions, usually in the form of free rent and tenant improvement allowances. E Effective Rent: The average rent paid over the lease term by a tenant adjusted downward for financial concessions paid by the landlord (such as free rent), and upward for rent escalations and costs that are paid by the tenant (such as operating expense pass throughs). Escalation: A clause in the lease which increases the rate of rent over the term of the lease, usually on an annual basis. The most frequently used types of escalations are Fixed Percent (%), Monetary ($/sf), and Index (CPI). Most leases with a term longer than one year will have escalation. While most tenants want to focus on initial lease term rent, negotiating a lower escalation clause can have a significant impact on effective rent on a long-term lease. F Full-Service Lease: Also called a Gross or Full-Service Gross. Typically defined as a lease that has one, all-inclusive rental rate which includes both the base lease rate and the building standard services which are paid by the landlord (property taxes, insurance, and common area maintenance) combined into one figure. Full-Service leases are commonly found in multi-tenant office buildings. G Gross Lease: Also called a Full-Service or Full-Service Gross. Typically defined as a lease that has one, all-inclusive rental rate which includes both the base lease rate and the building standard services which are paid by the landlord (property taxes, insurance, and common area maintenance) combined into one figure. Gross leases are commonly found in multi-tenant office buildings. I Industrial Gross Lease: Also called a Modified Gross Lease. A lease where the tenant pays for their pro-rata share of one or more of the of the expenses related to their occupancy of the building in addition to the base rent. For example: the tenant pays base rent plus their own electric or janitorial and the landlord pays the remaining expenses. Terms of industrial gross leases vary drastically so exact details must be confirmed for each lease. Industrial Gross Leases are common in industrial or warehouse property. L Lease Commencement Date: The date when lease term and the benefits of the lease commence. Lease Commencement Date may or may not be the same as Rent Commencement Date. For example, a lease may commence on the Lease Commencement Date for the purpose of completing tenant improvements. After the space is ready for occupancy, The Rent Commencement Date triggers the start of the tenant’s free rent period or when the tenant’s first month of rent is officially due. Since the Lease Commencement Date starts the clock on the term of the lease and establishes the Lease Expiration Date, a Commencement Letter should be executed by both parties. Lease Expiration Date: The date when lease term and the benefits of the lease expire. Lease Term: The length of the lease usually stated in years, or months. Load Factor (LF): The add-on factor in your rent equation that accounts for the building common areas outside your suite (lobbies, shared restrooms, stairwells, storage rooms, and shared hallways, etc..). Load Factors commonly range between 10% and 20%. Usable Square Footage (USF) X Load Factor (LF) = Rentable Square Footage (RSF). M Modified Gross Lease: Also called an Industrial Gross Lease. A lease where the tenant pays for their pro-rata share of one or more of the of the expenses related to their occupancy of the building in addition to the base rent. For example: the tenant pays base rent plus their own electric or janitorial and the landlord pays the remaining expenses. Terms of industrial gross leases vary drastically so exact details must be confirmed for each lease. Modified Gross Leases are common in industrial or warehouse property. O Operating Expenses (OPEX): The costs associated with maintaining and operating a commercial property. A significant portion of Full-Service or Gross rent comes from operating expenses. Operating expenses are made up of Property Taxes, Insurance, and Common Area Maintenance (CAM). P Parking Ratio: Relationship of parking spaces available per Rentable Square Footage (RSF). Typically shown as N:1,000 RSF. Pass-Through: In Full-Service and Gross Leases, specified operating expenses “pass through” from the landlord to the tenant. These expenses can include any combination of property taxes, insurance, and common area maintenance (CAM). The expense amount for the Base Year (typically either the year of lease commencement or the first calendar year of tenancy) is the maximum amount of expenses the owner will pay over the life of the lease per year and any expenses over the Base Year amount will be passed through to the tenant in addition to the Base Rent. R Rent: The negotiated compensation for which the tenant will be responsible for payment to a landlord. Rent structures vary depending upon the services provided. For example, Full-Service rents include Base Year operating expenses and are significantly higher than Triple Net (NNN) rents where operating expenses are paid in addition to the base rent. Rent Commencement Date: The date when a tenant is obligated to begin paying rent. Rent Commencement Date may or may not be the same as Lease Commencement Date. For example, a lease may commence on the Lease Commencement Date for the purposes of completing tenant improvements. After the space is ready for occupancy, The Rent Commencement Date triggers the start of the tenant’s free rent period or when the tenant’s first month of rent is officially due. Rentable Square Footage (RSF): The usable (actual and exclusive) square footage plus a load factor (portion of the building’s shared or common space such as lobbies, shared restrooms, stairwells, storage rooms, and shared hallways, etc..). Each tenant pays for these common areas in proportion to the amount of space they lease in the building. Typically, rents are based on rentable (RSF) not usable square footage (USF). Rental Rate: The cost to occupy commercial space, commonly quoted as a dollar amount per square foot of space per year. Rental rates are based on rentable (RSF) not the usable square footage (USF) of a property. S Sublease: An agreement between a tenant whose lease has not yet expired, a new tenant looking for space, and the property owner. Sublease space can be found at below market rates, but trade-offs may include limited or no flexibility on tenant improvements, renewal options, and financial liability. T Triple Net Lease (NNN): A lease where the tenant pays for their pro-rata share of all the expenses related to their occupancy of the building in addition to the base rent. Each “Net” refers to Property Taxes, Insurance and Common Area Maintenance (CAM). NNN leases are most common in retail and single-tenant office properties. U Usable Square Footage (USF): The actual and exclusive space you occupy inside your suite where you conduct your business. Usable Square Footage does not include common areas of a building such as lobbies, shared restrooms, stairwells, storage rooms, and shared hallways. V Vacancy Rate: Expressed as a percentage, the total amount of available space compared to the total inventory of space in a building or market. An office vacancy rate of 10% in a market is roughly considered to be market equilibrium. For example, markets with vacancy rates above 10% tend to be tenant friendly markets.  One of the first steps in planning for office space is to determine how much space you need. These “rules of thumb” can help estimate the amount of usable square feet required for your business based upon uses.
So far, the math is simple. Determine the number and size of offices, conference rooms, etc... plus an estimate of space needed for circulation (hallways/corridors) inside your suite and you can roughly estimate your usable space requirement. Now that you’ve developed an estimate of the amount of space you’ll need, it should be straight forward to identify the space alternatives that meet your size and budget requirements. But it’s not. Because, while tenants understand and think in terms of their usable space needs and budget limitations, commercial office space is typically marketed as rentable square feet.
Office tenants understand that you can’t determine rent without the rental rate and square footage. What they often don't understand is that load factor is the variable in the rent equation used to calculate the rentable square footage.
The load factor is applied to the tenant’s usable square footage to convert it to rentable square footage. Understanding how square footage is calculated is essential to determining the best size fit and value for your office space. For example, two alternatives with the same rentable square footage may appear equal but they aren’t.
From a tenant’s perspective, with the differences in load factor (20% vs 10%) you gain 757 usable square feet (9,090 USF - 8,333 USF) in Option 2 versus Option 1. For this reason, it’s important to understand how square footage calculated on your commercial office lease.  Office tenants always understand that you can’t determine rent without the asking rent and rentable square footage (RSF). What they often don't understand is that load factor is just as important to the calculation of their rent.
If you require a set certain amount of office square footage, understand that not all office spaces with the same advertised rentable square footage and the same asking rent are the same. Usable Square Feet (USF) One of the first steps in planning for office space is to determine how much usable space you need. These “rules of thumb” can help estimate the amount of usable square feet required for your business based upon uses. So far, the math is pretty simple. Determine the number and size of offices, conference rooms, etc... plus an estimate of space needed for circulation (hallways/corridors) and you can roughly estimate your usable space requirement. Simply put, usable square footage is the actual and exclusive space you occupy inside your suite where you conduct your business. Usable square footage does not include common areas of a building such as lobbies, shared restrooms, stairwells, storage rooms, and shared hallways. Now that you’ve developed an estimate of the amount of space you’ll need, it should be pretty straight forward to identify the space alternatives that meet your size and budget requirements. But it’s not. Because, while tenants understand and think in terms of their usable space needs and budget limitations, available office space is typically marketed as rentable square feet. Rentable Square Feet (RSF) Your rent will be based on rentable square feet so understanding the difference between usable square feet and rentable square feet is essential to evaluating alternatives. Rentable square footage is your usable (actual and exclusive) square footage PLUS a portion of the building’s shared or common space (lobbies, shared restrooms, stairwells, storage rooms, and shared hallways, etc..). Each tenant pays for these common areas in proportion to the amount of space they lease in the building. Since no two buildings have identical amounts of common area, you will rarely if ever find that two spaces listed with the exact same rentable square footage are equal in usable space. This is where the math stops being simple. Load Factor (LF) The variable in your rent equation that accounts for these common areas is called the load factor. Load factors are typically represented as a percentage and commonly range between 10% and 20%. The formula to calculate your rent looks like this:
While you’d think that such an essential variable in the rent equation would be included in marketing collateral and industry databases, load factor is often not. In fact, it’s not uncommon for listing brokers to be uncertain or unaware of the building LF when showing space. Two things listing brokers like to withhold in tight markets, the asking rent and load factor. (More on Asking Rent: WITHHELD). For example, two alternatives are marketed with the same size (10,000RSF) and asking rent ($60.00/RSF/YR) may appear equal but they aren’t. When you include the differences in load factor (20% vs 10%) you gain 757USF (9,090USF - 8,333USF) in option 2 for the same rent as option 1.
So, while the two alternatives are marketed as the same size (10,000RSF) and asking rent ($60/RSF/YR), alternative 2 is a better value at $66.01/USF/YR based on a lower load factor. That is why load factor matters. |
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