Commercial Real Estate Challenges When Comparing Office Options

Offices and office space has always fascinated me. I love bringing people together and customizing a sweet office. Just think about it: what percent of your waking hours do you spend at work? If you’re like me, and it’s a high percentage, you want to have a great space that you genuinely look forward to going to several times a week. Now, the coolest office space in the world won’t make up for a weak corporate culture, but if you have a great corporate culture, an amazing office is just icing on the cake.

Only, commercial real estate makes it mind-numbingly complicated to simply compare the costs of different offices. Here are some of the common items thrown around:

  • A number of months that are “free rent” or half rent
  • Tenant improvement allowance per foot rented (e.g. the amount of construction costs paid for by the landlord to customize the space)
  • Moving/cabling allowance per foot rented (e.g. money to pay for wiring and moving costs)
  • Percent rent escalation per year and how soon does the escalation start
  • Lease term and how that affects all the allowances above (e.g. a shorter lease results in smaller allowance but more flexibility for startups)

Imagine a spreadsheet with many different variables and that’s what’s needed to compare different office space options. There has to be a better way for startups to rent office space.

What else? What are your thoughts on these challenges when comparing commercial real estate options and what are some additional challenges?

4 thoughts on “Commercial Real Estate Challenges When Comparing Office Options

  1. There are many more hooks and barbs that can catch a budding entrepreneur…especially in the fine print of the lease. At the risk of sounding self-serving, a prospective tenant should hire the services of a commercial real estate broker to help them compare quantitative and qualitative differences between site prospects, and help avoid / mitigate the legal mine field of the documentation. A tenant representative is typically paid by the landlord, so there’s no good excuse to go it alone!

  2. David,

    I couldn’t agree more: commercial real estate makes it mind-numbingly complicated to simply compare the costs of different offices.

    One huge benefit of going the shared workspace route (like Atlanta Tech Village) is that it makes it very simple to understand the associated costs. This also allows business leaders to maintain their focus on more important things – like growing revenue.

    Now for a little shameless self promotion. For decades, the CRE industry has used antiquated and error-ridden MS Excel spreadsheets to analyze and compare lease alternatives.

    That’s why we created LeaseMatrix. It is a simple, intuitive web-based application which allows anyone to quickly compare multiple lease alternatives.

    For instance, here is an example of a lease comparison report which compares 4 alternative office spaces in Seattle:

    http://lease.io/dcdffd41e1a

    A report like this one can be created in under 5 minutes using LeaseMatrix

    Because our business model is Saas, I’ve been a loyal reader of your blog for over a year now. If there is any way I can return the favor of the information you’ve given me by providing you or anyone you know with a complimentary account to analyze commercial leases, I would be thrilled to do so. I would even be glad to help them set up their analysis, if needed. Anyone can email me at support AT leasemx DOT com.

    Best of luck with Atlanta Tech Village. I know it will lead to great things.

    Warm regards,
    Dominic

  3. I have lots of experience leasing office space and believe that the Atlanta Technology Village concept of “pay per head” pricing is a NO BRAINER for startups. This is largely because it removes the “friction” of commercial real estate decision-making and implementing the transaction/relocation. Simplicity allows the startup to prioritize focus on their business.

    Here are a few more ECONOMIC variables to compare:
    • Varying lengths of term (one option may be 38 months while another is 27)
    • Existing rent obligation (what you may still owe in your current office space)
    • Varying rent structures: Full Service Gross, Modified Gross or Triple Net (too hard to explain here)
    • Varying sizes of different office suites (10% difference is small when comparing 1,000sf to 2,000sf suites, but makes HUGE difference in rate/sf)
    • Required Security Deposit or Letter of Credit (this often surprises entrepreneurs – consider it early when evaluating space)

    A few NON-ECONOMIC comparison points that matter to Startups:
    • Termination Options
    • Sublease rights
    • Expansion Options
    • Rights of First Refusal and Rights of First Offer (they are different)
    • “Must Take Provisions” (begin the lease term paying for only 2,000sf but you “must take” add’l 1,000sf one year later)

    After doing a quick “high level sanity-check” to compare general pricing and whether the ATV environment is right for them, startups would be wise to avoid the mind-numbing process of commercial real estate decision-making and really look hard at space in the ATV.

  4. All the variable can be tidied up in an efficient financail analyysis that your tenant rep shoul provide. The devil is in the details, especially when it comes to operating expense pass through exposures. I have a few blogs on the subject at TenantGuardian.com if you are interested. If your space is small and short term you may want to check out techspace or google “coworkingspace” and your geographic preference.

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