Selecting the Right Office Space
Whether you’re setting up your company’s first office or moving your established business to a new location, you’ve got a lot to think about.
If your business is new, you’ll need to examine your needs and identify an optimal location. If you’re thinking of moving, the first step is to analyze why your firm can no longer thrive in your current space, or why business would boom somewhere else. Then, explore the many options available - from ownership arrangements to rental space.
Pre-Move Analysis for Existing Businesses - Find the Right Reason
Before you even consider looking for a new office space, thoroughly analyze what is – and isn’t – working in your current location. An office lease or purchase is likely to be a long-term commitment and one of your company’s biggest expenditures. Factors to consider include:
- Space. Many companies relocate because they lack sufficient room for product display, inventory or employees. Or they find that because of advances in technology, they don’t need as much space as they used to for files, printers and employee offices. Consider how much space you need now and how much you expect to need in the future.
- Are you in a neighborhood where your business can thrive? Are you close to customers and clients? What about suppliers? Do you need access to major highways? What about parking and security?
- Rent and operational costs. Are you paying a premium for a location and amenities you don’t really need? Are you spending too much of your budget on rent, taxes and utilities? It may make sense to relocate to a more affordable community or space.
- Consider whether your existing space meets your current and future needs for such things as loading docks, warehouse and production facilities and building security. What about electrical wiring, plumbing, internet and other technical capabilities?
- Where do your key employees live, and how will a move impact them? An office move that creates long commutes may be a bad idea. On the other hand, moving your base of operations may open up greater access to employees with the skills and training for your industry.
- Your current location may project the wrong image for your business.
- Shrinking business district. When neighboring businesses are moving out of the area, it can mean disaster for companies that depend on foot traffic.
When you have completed your analysis, score the points in order of priority. The results will help you determine whether moving your business headquarters is the smart thing to do in the near term.
Once you’ve decided to look for a new home for your business, it’s time to do some research and find the best community for your needs. Consider these factors:
- Income taxes and sales taxes vary greatly from state to state. The same goes for city and county fees, such as property, occupation and wage taxes. So if a neighboring state, county or city is close to where you and your employees reside, it could be cheaper to run your company there.
- A neighboring city may be friendlier to the type of business you are opening. Consider variations in the cost of rent and availability of labor as you compare adjacent towns.
- Supplier and vendor access can fluctuate across geographic areas. This can be a key factor if your business requires quick delivery turnaround.
- Examine the types of businesses that would operate near yours. Would their patrons frequent your business - and vice versa? Is it in a safe part of town? What does traffic look like? What would your commute look like?
- Wages and salaries. Think about your short- and long-term business plan. Does the workforce in the area you're considering meet your requirements? Can you adjust your wage scale to attract talented employees?
- Investigate relocating to an economic development zone that offers tax incentives, credits and other benefits to businesses that establish or expand in that area. Geared primarily to manufacturing businesses, the provisions vary from state to state. Contact local government offices to investigate economic development programs and other incentives, including:
- Enterprise Zones. Enterprise zones typically exempt business owners from paying property taxes, but other tax breaks may apply. Generally the tax break lasts for a fixed number of years, most commonly from three to as many as 15 years. Other incentives may include low-interest loans, credits for training new employees or subsidized utilities.
- Foreign Trade Zone. Foreign trade zones - known internationally as free trade zones - allow businesses to avoid custom fees and import and export taxes. Typically they are located near major transportation hubs like interstates, airports, and railways.
Check with city or local government offices to learn about economic development zones and other community or government-sponsored incentive programs.
What Do You Need?
Once you've narrowed your search to a geographic region, it's time to get specific. And that means making a list of what you need to run your business effectively – both now and in the future. Your list should identify the non-negotiable features that your new space must have. It can also identify items that you’d like but could live without. Establishing priorities will help you keep a clear head and make good decisions when it comes time to evaluate your options.
Your list might include such things as:
- Size and layout requirements
- Type of structure and appearance
- Special requirements such as ceiling heights and loading docks
- Internet infrastructure
- Power, water and other utility requirements
- Access for persons with disabilities
- Facilities such as restrooms, kitchens and break areas
- Flexibility for expansion, contraction or alteration should business requirements change.
- Your budget
Your Office Space: Size Matters
When assessing your office space needs, some standard rules of thumb apply. Figure on 175-250 usable square feet of space per occupant. Of course, this can vary considerably, depending on the type and style of the business.
- Typical "presidential" offices range from 150-400 square feet.
- Secretarial and administrative space ranges from 60-110 square feet.
- Conference rooms should allow 25-30 square feet per person for a traditional arrangement. In a classroom or theater style setup, estimate 15 square feet per person.
- Your reception area should accommodate a receptionist as well as the average number of people expected at any given time. If you routinely will have groups of six to nine people arriving and waiting for appointments, make sure you have at least 300 square feet. For smaller groups of three to five, plan on at least 200 square feet.
- Consider other space requirements, such as file rooms, library space, break rooms, mail rooms and general storage. A conference/hospitality area is useful for frequent staff or client meetings.
If you work in a creative environment where teamwork is important, you may want open areas to collaborate. On the other hand, when employees are involved in phone negotiations, research and other high-concentration tasks, private offices or cubicles may be more workable.
Factor in Cost
Once you’ve identified what you need, consider what you can afford. A fabulous space that’s way over budget is seldom a good choice, but the cheapest option may not be your best bet either. Weigh the costs and benefits of each location in terms of your requirements and goals. Think critically about what you really need to help your business succeed. And remember to factor in utilities, taxes, build-out costs and other expenses.
Get Help from the Pros
Once you've done a cost analysis and market research, engage a qualified real estate or buyer's agent to take you through the purchase or rental process. Agents understand the market, know the area and can help you find the right fit for your circumstances.
A good agent can also help you and the landlord develop win-win compromises on items like rates, improvement costs, rights of expansion, renewals, and lease cancellation terms.
Agents may also help with:
- Market and data analysis. Agents know what is available, what might be available in the future and have a solid sense of overall lease rates. An agent can also help you determine other costs like taxes, fees, utility costs, etc.
- Space requirement and location analysis. Agents can serve as a sounding board as you describe the type and amount of space you need. They can recommend alternatives and help you find the right location for your type of business. A good agent also has a sense of where your competition is and where compatible businesses are located.
Office Costs - Buying Versus Leasing
Buy or lease? Which will best suit your business, your finances and your future goals?
Here are some things to consider:
- Cash flow. Buying requires more cash up front to make a down payment, and you’ll likely have to personally guarantee the mortgage. Those factors may be deal breakers for a new business with limited cash flow and an uncertain future.
- Buying is a viable option if you plan to stay in one location for at least several years, particularly if the neighborhood is well suited to the market.
- Business owners looking to buy usually are willing and able to make a substantial real estate investment.
Buying office space may require cash up front, but the benefits may make the investment worthwhile. Benefits of buying include:
- Fixed costs. By locking in a long-term commercial mortgage, you won't be dealing with rent increases.
- Tax deductions. Owners can usually deduct the full amount of mortgage payments, with repairs written off immediately.
- Extra income and space flexibility. You may be able to lease out a portion of the building if you have excess space. If you move or close your business, you can lease the entire premises.
- If you need to make substantial changes to the building, you own those changes. Business hours are up to you, and you can remain in your location indefinitely.
- Future sale. You'll benefit financially if you sell in a good real estate market.
However, buying can also have its drawbacks:
- Upfront costs. Commercial space will initially cost far more up front. Property, appraisal and maintenance costs, along with a large down payment and potential property improvement costs, also are concerns.
- Long deduction period. Improvements to commercial properties have to be deducted over 39 years. Depreciation on commercial buildings likewise is taken over a 39-year period.
- Lack of flexibility. You may outgrow your space and be forced to sell.
- Risk of a poor real estate market. Should you decide to sell, economic downswings could force you to accept less than you paid, or even less than the amount you owe on your mortgage.
On the flipside, leasing office space allows business owners to set up operations in prime locales at affordable prices with little initial cash outlay. But as with buying property, there are two sides to consider.
Benefits of leasing include:
- Free-up working capital. With your money not tied up in real estate, your business can respond to market opportunities. Your ability to borrow funds will not be as limited as it would with buying office space.
- Easier to qualify. An excellent credit rating is not as critical for leasing, and you may be able to avoid signing a personal guarantee. This can be a big plus for start-ups and small businesses.
- Tax deductions. Your monthly lease payment is tax deductible as a business expense.
- You can move to another location at the end of your lease, minus the hassle of selling.
- Less risk. You won’t lose your investment in a bad real estate market.
- You'll be free from the headaches and costs of maintaining your own building.
Downsides of leasing include:
- Variable costs. You may be subject to annual rent increases and higher costs when your lease expires.
- Non- You can lose your office space when your lease expires.
- Broken lease. Should you choose to break the lease, you can be liable for rental costs for a prescribed time period. The landlord may hold you responsible for advertising fees incurred in a tenant search.
- Lack of equity. You will be funding someone else's retirement with your lease payments.
- Lack of control. You may not be able to modify the space to your liking, and your landlord may be difficult to work with.
Tips on Closing a Lease Deal
Commercial real estate experts advise projecting your long-term space needs before signing a lease agreement. Standard contracts may run for several years, so plan accordingly. Other tips to consider:
- View a range of properties before making your final decision.
- Read the fine print. An office lease is a significant long-term commitment, and landlords commonly draft leases in a way that’s favorable to them. Make sure you read the lease and understand what it says. Consider hiring a real estate lawyer to review the lease before you sign it.
- Seek concessions from the landlord. Depending on the market, you may be able to negotiate a few months of free or discounted rent or a "tenant improvement allowance" to allow you to modify, build-out or improve the space.
- Look for hidden expenses in the agreement. Charges above your fixed or base rent, such as operating expenses, are not uncommon. These items may not be listed in the term sheet, so ask specifically for this information.
Plan for the worst. Understand what would happen if you had to break your lease or if a fire or natural disaster struck your building.