What is load factor and why does it matter?
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.
As tenant representatives, we advise our clients that ownership matters. The differentiator between two similar buildings and spaces with like amenities and rent can often come down to the quality of ownership. Buildings that have been owned and managed by the same entities for a long period of time tend to be better managed.