It’s important that tenants fully understand the concept of space measurement when leasing office space in a multi-tenanted building. Three ways to maximize the efficiency of space measurement include:
- Understand the loss factor calculation
- Utilize the services of an experienced space planner or architect
- Have the space measured prior to lease signing
In New Jersey, landlords typically quote office space as a rentable number of square feet. Rental rates are quoted per square foot on an annual basis. This rentable number is the square footage you pay to lease. Multiply the rentable number by the per square foot rate to calculate the annual rent. Built into this number, however, is a “common area factor” for hallways, staircases, elevators, etc. also used by the tenant. This common area factor is referred to as a loss and quoted as a percentage. The usable square feet number represents the space you actually occupy within your unit of leased space and is less than the rentable square feet you are paying for. Measurements used in determining commercial space rents are based on guidelines set by the Building Owners and Managers Association (BOMA) International.
For example, if a tenant is considering two buildings with the same rental rate of $25 per square foot and building A has a loss factor of 15%, the tenant will pay $29.41 per usable square foot and occupy 17,000 square feet. If the same tenant leases space in building B with a loss factor of 20%, the tenant will pay $31.25 per usable square foot and occupy 16,000 square feet.
Method used to calculate usable space
- Rentable square foot = Usable square foot X (1 + Add on %)
- Rentable divided by Usable = add on factor
- Rentable square foot X (1-Loss factor %) = Usable square foot
In New Jersey, an average acceptable range of loss factor is 9-17%. If a landlord wants to remain competitive and the building has a higher than average loss factor, the landlord may adjust the rental rate down or absorb a portion of the loss factor to bring it in line with neighboring properties. A tenant seeking a Class A building with a grand lobby may not prioritize a high add-on or loss factor. As a component of the lease’s financial aspect, however, it should still be taken into consideration. It is essential to understand this information before signing the lease agreement. Leases typically describe space to be leased as “approximate.” The lease does not detail the loss factor.
Another important factor is to only commit to occupying the minimum amount of space necessary to operate your business. Start by analyzing your needs regarding components of the space plan. For example, how many private offices you require, size of bullpen area, conference room, etc. Also consider the placement of employees within your space. An experienced space planner can draft various versions in order to discover the most efficient use of space to minimize your necessary square footage and create the most functional floor plan for your specific needs.
Also, most proposals include language that specifies an architect must confirm the square footage. You do this to avoid paying for more space than you occupy.
The key when considering various buildings for leasing office space is comparing the rental rate per usable square foot. A property with a higher asking rent and a lower loss factor may be a better value than a lower asking rent and a higher loss factor. A financial analysis is the most comprehensive method to compare occupancy costs for office properties. This analysis accounts for both rentable and usable rental rates as well as any additional monthly costs. It calculates each space down to a finite number for the occupancy cost for the lease term. This enables you to compare your options and make an educated decision.
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Please call for more information about leasing office space in New Jersey.
Jeanne Sabo-Rothenberg, CCIM
Commercial Advisor
eXp Commercial
Cell: (908) 377-9004
https://www.commercialrebroker.com/
jeanne.sabo@expcommercial.com