How do you translate people to square feet?

Companies think of space in terms of people, but real estate leases think of space in terms of square feet. In a typical office property, each person translates to roughly 250 square feet. If you have 30 employees, you will need roughly 7,500 square feet of office space. I have seen start ups using an extremeley dense open environment get as low at 140 square feet per person, which would mean 30 people could fit like sardines into 4,200 square feet. The number can be adjusted up or down depending on how open the enviornment is, but as a general rule of thumb 250 square feet per person is good place to start.

A Tale of 3 Spaces

Why would a trophy asset downtown be priced lower than a brick building in SOMA? While the last downturn centered in SOMA, this financial crisis has most strongly impacted the financial district. Rents are dropping north to south in the city and a majority of the sublease space, which drives down rents, is in the financial district. Tech companies were hit later in this cycle and are starting to list subleases in SOMA (Yahoo, LiveJournal, Slide etc), which will continue to pull SOMA overall rents downward going forward. Through three spaces, let’s examine your pricing options today.

– Financial District Option: 101 California 19^th floor sublease through 10/31/12, trophy asset in the heart of downtown at California and Front, access to all forms of transportation and abundant amenities, high end build out with wood floors mostly open with conference rooms/private offices, all furniture included, asking $28 FS/square foot/yr. 101-california-sublease-flyer-19th-floor2

– South Financial District Option: 217 2nd Street 3^rd or 4^th floor, brick building near 2nd and Howard next to the CNET/now CBS building, First Round Capital a floor above, all open needs improvements, no furniture, asking low $30sFS/square foot/yr 217second-street1

– SOMA Option: 139 Townsend 5^th floor, brick building at Townsend and 2nd across from Tres Agaves in the heart of SOMA/SF tech community, mostly open with conference room/private offices, asking mid $30sFSE/square foot/yr 139-townsend-sublease-flyer

Based on the above comparison, if you decided to lease 101 Cal over 139 Townsend, you would save an estimated $57,000 per year in rent. The above amount does not even include the out of pocket expenses associated with buying furniture and cabling the SOMA alternative.  The above comparison can be found in smaller and larger spaces as well and demonstrates the point that teams should be evaluating if their location preference is a nice to have or need to have.

If your company has always been located in one area and you are contemplating a move. I would suggest doing an employee map. This will plot all of your management and employees by division on a map, so that you can understand where your employees come from and what type of transportation options they are using. We can provide this service to you. In these tough times, saving money is a strong priority for most companies, and being open to evaluating other submarkets can help you accomplish that goal.

Deciphering NNN, IG and FS

Below is a quick summary of the three main types of commercial leases: NNN, Industrial Gross (sometimes known as modified gross), and Full Service. Different submarkets and even different buildings in the same area use the three type of leases. The tenant is paying for the same thing at the end of the day, just paying in a different way. Here’s an explanation of each and how we can convert them to apples to apples to evaluate real estate alternatives.

 

 

• NNN (net lease): lease requiring tenant to pay in addition to the base rent, expenses of the property including taxes, insurance, maintenance, janitorial, etc separately.
• Industrial/Modified Gross: lease requiring tenant to pay part of the expenses of the property separately in addition to the base rent. Typically this includes electrical and janitorial expenses.
• Full Service: lease that includes all charges (base rent, electrical, janitorial, taxes). *However full service leases still have a base year, by which the tenant pays for building operating expenses and taxes above and beyond their lease’s base year.

 

 

The way to make everything apples to apples is by making every lease “full service equivalent”. This definition is when you add the additional separate expenses to the NNN and IG/MG leases to gross it up to the Full Service Equivalent. When you are evaluating options with different types of leases, you should ask what the estimated additional expenses are and add it back in to get the full service equivalent rent. A professional that has in depth market knowledge assessing options will be able to easily covert these numbers and give you back a digestible analysis. While buildings typically will not change how they write their leases, this will prepare your team and ensure there are not additional surprise payments.