Across the country, office space rent has increased by an average of 11 percent. In certain tech markets, such as East Cambridge, Santa Monica, and Mountain View, the numbers are even more exorbitant – with rent premiums sometimes increasing more than 75 percent. Investments in office spaces are at a seven-year high throughout the world, with higher costs being passed onto business owners.
In Midtown Manhattan, one city report expects that by 2018, all Class B and Class C office space will be occupied by 2018. This is the type of office space that is typically leased by startups and tech companies, leaving the question of where these types of companies will be able to go.
Of course, increasing rent premiums and potentially limited supply is just part of the problem of leasing office space, with costs such as furnishing offices, building out your space to fit your needs, as well as cash deposits as things to worry about. Along with the high numbers of hours you might spend looking for the perfect space, all the costs make office space a costly expense.
However, the real risk when it comes to leasing office space relates to the long-term commitment you have to make. In many cases, this means choosing between leasing a space that fits your current needs or leasing a space based on your future projected needs. If you project too low, your team will be crammed in tight. If you project your future needs to ambitiously, then you might be left with unproductive and unneeded space.
In time, the market is slowly beginning to change and offer up different solutions that can help mitigate some risks of commercial real estate. However, it’s up to the tenant to recognize these risks and work to reduce them. In looking at office spaces, there are a few things to keep in mind.
The first is to recognize that it’s not a bad thing to be afraid of commitment when it comes to an office space. While the market prefers multi-year leases, you can look to limit liabilities and maximize cash flow.
The next thing to think about is that it’s impossible to forecast what your business will look like one, three, or five years from now. You may be large or smaller, and your office lease needs to reflect that type of flexibility. While the current commercial leasing model makes this difficult, you need to work to find something that will allow you to scale your business.
Another item to consider is that office space is typically the second biggest cost after payroll, making it vital to optimize your space. One non-traditional way of doing this would be to share offices. For example, if you lease space that works for your current business size, then you can try to share another business space if you expand, rather than moving into a bigger space.
On the flip side, if you invest in a space to fit future needs, then you could share any excess space until your team is large enough to support the bigger area. This type of method can help keep you flexible and offset any projection errors on the future size of your company. It’s important to remember that rent is an expense, not an investment, and as such is should be viewed as such. Any amount of money that you can save on office space can be reinvested in your business, which will provide a much better return rate in the long run.
Photo Credit: Jeffrey Zeldman