The 5 Hidden Costs of Leasing an Office Space

What is the true cost of a workspace? Besides the monthly rent, how much will you pay for office space once all of the costs are accounted for? These are a few questions business leaders ask themselves each year, including myself.

Over the years, two main workspace options have become the primary options for many companies - traditional leased office space or coworking spaces. Tenants in traditional long-term leases not only have to foot the bill for a 10-year lease, but also take on the  costs of office design, build-out, and furnishings. Those that wish to avoid the long-term financial commitments of a traditional lease have more recently gravitated to coworking options.

According to a report by Colliers International, the number of coworking spaces in the U.S. grew from 300 spaces in 2014 to more than 4,000 in 2017. Shorter-term commitments, simplicity around workspace design, and the elimination of construction costs are a few reasons why coworking makes sense for some businesses.

Yet, it can be difficult to understand and compare the hidden costs associated with either option. Let’s explore the total cost of ownership for each option.

Traditionally Leased Office Space
$1,131 per employee, per month for 5-10 year commitment

A traditional lease for office space commonly yields a high total cost of ownership because the lease terms do not match the tenants needs. They often outgrow the space too quickly or underutilize the space they are paying for.

1) Finish Out
The tenant has to pay construction costs to build the space to the team’s specs. The cost = $50-$70 per square foot.

2) Design & Furnishings
The tenant has to hire designer and furniture vendors to bring the space to life. The cost = $20 per square foot.

3) Security Deposit
The tenant will pay for three to six months of rent up-front. The cost= $150,000.

4) Room for Future Growth (over-leasing)
On average, growing companies must lease 25% - 50% extra space to accommodate future growth plans. The cost =  33% of total rent.

5) Sub-leasing (outgrowing)
Half or more high-growth teams exceed their growth projections and end up needing to move to larger space before their term is up, incurring sizable subleasing expenses. The cost = 6% broker commissions + $3-5 per square foot recovery deficit + 3-6 months lost rent.

Coworking Spaces
$1,313 per employee, per month for 6 month - 2 year commitment

1) Finish Out
Coworking operators pay to build-out and furnish spaces under their own 10-15 year leases, and then pass all of these costs along to their subtenants in the form of monthly fees. This results in a very high cost per square foot. The cost: $110-130 per square foot

2) Flexibility Option
While not as punitive as long-term landlord leases, coworking operators usually charge a penalty if a tenant needs to move out before the end of the contract. The cost: 2-3 months of rent

3) Density
A key to making the numbers work for coworking operators is to maximize the revenue per square foot by increasing the number of employees in the space. Traditional office space has a density of 125-150 sf per employee where as coworking averages 80-90 sf per employee. The cost: 36% less space.

Short-term, Turnkey Office Spaces
$1,065 per employee, per month for 1-3 year commitment

Recently, a third option of workspace has entered the market that may make the most financial sense for teams of 10 or more. Short-term, turnkey office spaces offer the personalized, private workspace of a traditional office lease with the turnkey convenience of a coworking office - all at a cost lower that either option.

1) Finish Out
Short-term, turnkey office spaces providers partner with landlords to offer workspaces that are already built-out and move-in ready. The cost = $0.

2) Furnishings
You order exactly the furnishings you want for your office space and you can lease them for a flat monthly rate. The cost = $6-$7 per square foot

3) Security Deposit
For qualifying tenants, financing options for the down payment which can cost $100,000 or more may exist, allowing tenants to preserve their growth capital. The cost = Typically less than $5,000 per month.

4) Room for Growth (over-leasing)
Most short-term, turnkey office spaces are available for terms between one and three years, so tenants do not need to warehouse nearly as much space for future growth. The cost = 20%.

5) Sub-leasing (outgrowing)
Shorter-term commitments carry lower risks of outgrowing a space, but for many high-growth teams this is still a common occurrence. Tenants have the option of avoiding what can be a $100,000 expense with a flexible move insurance option. The cost = $3,000 per month.

Below is a quick-view table of the cost comparison per space.

There’s a well-known axiom in the real estate industry: “the most expensive real estate is space you don’t use.”  Hands-down, the savviest business strategy to lease a workspace is to pay for it in shorter, incremental ‘chunks’ after you are certain about the size of your workforce. That means one to three years for most teams. Today’s short-term, turnkey office spaces are better suited to the business models of today’s agile business - they function like AWS for office space. The result is a better experience for the employee and the lowest cost per employee.

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Scott Harmon

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