If you are a do-it-yourselfer who wants to undertake your office leasing transaction without a broker, think twice. Leasing an office by yourself is like taking a road trip to a destination you’ve never been to before, without GPS. There are too many variables to consider, information is fragmented and there are too many ways that you can veer off course and kiss your money goodbye. All without realizing that you could've compromised much fewer financial resources - not to mention the fact that everything in real estate costs too much and your final decision, good or bad, may well leave you locked in for years.
This is the one transaction that can turn your assets into liabilities for years to come, so I strongly recommend that you rely only on numbers provided by the people you hire, and that you supervise every step of the process, especially if services are done at no cost to you. Remember, "there is no such a thing as a free lunch".
Numbers don’t lie: $73/sf. X 10,000 sf. (RSF)= $730,000. Math is simple enough, but just like back when you were in school, if you miss one number - you’re toast!.
One of the most unclear (if not confusing), misjudged and biggest unknowns in office leasing transactions is the loss factor, and it’s probably the one calculation that will determine whether you took the right decision, or a dumb decision.
Loss factor (LF) is the difference between the area you will pay for - RSF (rentable square foot), and the area that you will actually use - USF (usable square foot).
Say space ‘A’ is listed as being 10,000 sf. @ $73/sf.; and it has a (LF) of 26%. On the other hand, space ‘B’ is also listed as being 10,000 sf. @ $65/sf, and has a (LF) of 37%. If this leads you to believe that space ‘B’ is the better option, here is how the numbers actually work out:
Cost of rent per year:
Space ‘A’: 10,000 - RSF - x $73/sf. = $730,000
Space ‘B’: 10,000 - RSF - x $65/sf. = $650,000
The space your will actually get to use (USF):
Space ‘A’: 10,000 at 26% = 7,400 Sq.Ft.
Space ‘B’: 10,000 at 37% = 6,300 Sq.Ft.
Your actual cost per Sq.Ft.: (USF)
Space ‘A’: $730,000/7,400 = $98.6
Space ‘B’: $650,000/6,300 = $103.2
# of employees you can fit and Cost/Employee/Yr, @ 125 sf./person (efficient floor plan):
Space ‘A’: 7,400/125 = 59 people -- Cost / employee / Yr = $730,000/59= $12,373/Yr
Space ‘B’: 6,300/125 = 50 people -- Cost / employee / Yr = $650,000/50= $13,000/Yr
--- Greater loss factor means less room and a higher cost per employee ----
So we ran the numbers, based on assumptions of $73/sf, 27% loss factor and 30 employees. Here is how much we found you could lose in one single transaction if you do not verify your numbers:
X= Loss factor; Y= cost/Employee/Yr
X+1% = Y+$200 x 30 employees x 10 Yr = $60K
X+3% = Y+$600 x 30 employees x 10 Yr = $180K
X+5% = Y+$1,000 x 30 employees x 10 Yr = $300K
There is a fluctuation of between $144 and $430 in additional Cost/Employee/Yr for each additional 1% increase in loss factor. The number gets higher as loss factors and area per employee increase.
Wouldn’t you rather buy Les Poochs V.I.P. Parfums with that money?
According to The Real Deal (“Lies in size” by Hiten Samtani), the average loss factor for office spaces in Manhattan is 27%. Our own study, based on hundreds of test fits that we have done for listings around the city, revealed that loss factors fluctuate between 20% and 50%. How is this possible? Shhhh. Nobody is watching. Loss factors are calculated based on the building owner’s criteria, so according to industry standards, it is ok to lose 27% of your space.
Here is how you can avoid making these mistakes:
Research and understand the pros and cons of each space, including what you’re getting – and what you’re paying for.
Hire a reputable tenant rep to help you – they’ll help you navigate the territory, and they know the issues that might never occur to you.
Be clear about your needs, always verify the numbers and don’t be afraid to ask questions.
Calculate loss factors and get test fits (space planning) in order to verify the numbers and arrive at the best possible outcome for your needs and your budget.
--- Remember free is not always the best: you get what you pay for ---
Paying a few thousand dollars to do the homework at the beginning might leave you feeling a pinch in your pocket, but not paying for it will definitely deliver a sucker punch to your bank account. To avoid it, make sure you crunch the right numbers in your leasing transaction, and get the right consultants onboard. Leasing a new space is a big move: you’ll find that it is worth it to pay to get the numbers right rather than winging it and running the risk of getting one square foot for the price of two.