Things You Need to Consider Before Investing in Your Own Office

When first starting out, office space for entrepreneurs and startups usually isn’t going to resemble the offices at Google or Facebook(we can all dream though!).

Photo: Jasper Sanidad

Photo: Jasper Sanidad

It usually looks a lot more like a quiet corner of your local coffee shop or the kitchen table at home. The expense of office space during the infancy of a company is usually not feasible for most startups and entrepreneurs.

At a certain point however, most companies will need to take the next step and invest in some form of office space.

If you are trying to decide if investing in your own individual office is right for you, there are a few things that are very important to consider before leasing your own individual office space.

THE SPACE

URBN Cowork - Sherwood Park, Alberta

URBN Cowork - Sherwood Park, Alberta

How much office space does my business need?

This is probably the most important question that you need to answer before looking for office space to lease.

This can be a very difficult question to answer, as you need to decide how much space you need today versus how much space you think you will need as your business grows.

For example, if you are committing to a 5 year lease you need to think about where you want your company to be in 5 years and whether this space will be able to meet your needs at that point. If you would like to grow your company from 3 employees to 10 in the next 5 years, you will have to decide whether you can afford to take on more space than you require right now in order to grow.

Can the office space grow with your business?

If you are unsure if the space that you are leasing will be enough for the future growth of your company, it is important to know if there is an option for you to take on more space within the building if needed.

If you are renting in a building where all of the other tenants are locked into long term leases and there is no vacant space, the opportunity to expand your space is not very likely. This means that if you outgrow your space you will potentially have to break your lease and move to another building.

Who else can move in?

If you are intending to take on more space than your company currently needs for future growth, one way to offset costs in the immediate future would be to sublease some of your space to another company.

You will need to ensure that your lease allows for sublease of a portion of your space and what the rules are (whether the landlord has to approve the company that is moving in, etc...).

THE LEASE

How long will the lease run? Is your company ready for the commitment?

The term of a lease can vary from building to building and is usually negotiable based on the rental rate of the space.

Generally the longer the term of the lease you are willing to commit to, the lower the rental rate. For this reason it’s important to decide if you want to stay in the space long term and whether you are ready to take on the risk of locking into a long term commitment.

Can you renew?

Lease renewal is also a very important factor to consider before signing a lease. If you do not have renewal terms in your lease that allow you to extend your lease for additional terms at a similar rate agreed to in the initial lease, you may run into issues once your lease expires.

At that point, the landlord can increase the rent to a much higher rate on a new lease if the market conditions have changed since your original lease.

If there is no renewal terms in the lease the landlord can also require you to vacate the space and not allow you to renew if they plan to use your space for something else.

It can be very difficult to have to go through the process of finding the right space for your company once again.

What options do you have to terminate your lease? Can you sublease?

Sometimes, a space just doesn’t work for a company.

Ideally it is because the company has been very successful and outgrown the office space. Sometimes however, it is due to a company not being able to afford the costs of the office any longer or the company shutting down.

Unfortunately these things can happen, and it is important to make sure that there are options in your lease for dealing with these situations.

The two most common options included in a lease for these occasions are termination and subleasing. If there is a termination clause in the lease it usually includes a penalty equal to a certain number of months rent and payment of the unamortized portion of the tenant improvement contribution by the landlord for the space. This is not ideal as it can be very costly, however it is good to have this option if there is no other choice.

Another option that can be included in a lease is sublease of the office space. This clause will usually outline an option to sublease the space to another company if they can no longer use the space themselves. Subleasing a space usually requires approval from the landlord pending a financial health check of the potential company subleasing the space.

Again, having to sublease a space to another tenant is not ideal, as your company is on the hook to pay the agreed upon rent set out in the lease, regardless of whether you are able to sublease the space for the same amount as the original rent.

How much does office space cost?

URBN Cowork - South Edmonton

URBN Cowork - South Edmonton

What is the rental rate of the space?

The rental rate of an office can vary greatly from building to building.

The rental rate of buildings is usually determined based on:

  • building age

  • location

  • building amenities.

Before looking for office space, you should have a monthly budget set out in order to narrow your search for what spaces you can afford.

As I previously stated, the rental rate can increase or decrease for each individual space based on the term of the lease. The longer term commitment, the lower the rental rate. You will have to decide whether you are willing to take on longer term risk for a lower rental rate, or pay a higher rent for a more flexible term.

Who pays for improvements?

Another factor that can affect the rental rate of a space is the tenant improvement contribution from the landlord. This is also usually negotiable on a lease, as a landlord will sometimes be willing to contribute a higher amount towards tenant improvement construction if the rental rate is higher.

Again you will have to decide whether you would rather pay a higher monthly rent to keep you upfront costs down, or put more money in initially to secure a lower rental rate.

The costs to complete the tenant improvements for your office will vary based on the level of finishes you would like for your office and whether any tenant improvements were previously completed in the space.

For example, a basic office can cost upwards of $60/sqft without any higher end finishes in a new space (think carpet tiles, t-bar ceiling and fluorescent lights).

How is the rent calculated?

Rent in a commercial building is calculated based on your $/sqft rental rate.

First they will calculate your rentable square footage which is different than the actual square footage of your space.

Your rentable square footage is calculated by taking your actual square footage and multiplying it by the building gross up rate. The gross up rate is essentially a percentage added to your total sqft to account for your share of the building service areas (janitor/electrical,/mechanical rooms and lobby) and common building amenity areas (common floor washrooms, building lounge, etc.)

The gross up rate can be much higher if a building has a lot of common building amenities, however it is typically around 12-15%.

What that means is that if you rent an office that is 1000sqft, you will be paying rent for 1150sqft. In that case, if your rental rate is $20/sqft, then your rent is calculated by multiplying $20/sqft by 1150sqft to give you your yearly rate of $23,000 or $1,916.67 per month.

You will also be responsible for your share of the buildings operating costs (property taxes, insurance, utilities & building maintenance) which is usually in the $10/sqft range and would add an additional $958.33 per month to your $1150sqft space.

Some buildings will include the operating costs in the rental rate so that you just pay one fixed rate, however the rental rate will usually be much higher to account for your share of operating costs.

It is important to consider these additional costs when comparing spaces, as one space may have a much lower rental rate, but have very high operating costs.

Make sure to find out the operating costs of each space when comparing different options.

ADDITIONAL COST RELATED FACTORS TO CONSIDER

What are other common expenses that come with having your own office space?

When making the jump to your own office space, there are a few recurring costs to consider outside of just your general monthly rent.

You will need to account for cleaning of your space, maintenance of the space, coffee/tea and probably most important, internet.

What are the upfront costs?

There are also the upfront costs associated with investing in your own office.

Office furniture is a major cost that you must incur when taking on your own office space. You can go with basic furniture that will cost less upfront but will need to be replaced sooner and have more maintenance involved, or buy good quality furniture with a much higher upfront cost.

You are probably looking at paying at least $500/workstation for even mid-range quality office furniture.

Are there non-monetary costs?

One other important factor to consider is not just the monetary costs of taking on your own office, but also the time costs that may be associated.

If you are renting your first space, odds are that you will be performing more than just your business tasks. You will most likely also be office IT, maintenance man, furniture mover and the person that has to drive in to building to let someone in when they forget their keys.

Running a startup can already be stressful, and these added stresses can sometimes be more than some people can handle.

Can you really afford this?

Before taking the leap and investing in your own office space, you really need to consider all of the associated costs, not just the monthly rent.

Once you are able to estimate your additional costs, then you will be able to truly know what type/size of space you can afford and whether it is worth it for your business.

A space of your own

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It is important to consider all of these factors before making the decision to invest in your own office space for your business. I don’t think there is any right answer or formula for when you should take on your own office space or what type of space you should be moving into.

Each individual company has its own set of values and goals, plus budget, that will help to guide that decision.

If you aren’t ready to commit to a long term lease or purchase your own office space, coworking spaces can be a great option. They offer shared collaborative workspaces and private offices on a month to month commitment.

Moving your company into a coworking space gives you the benefit of working in a professional space with other like minded entrepreneurs and small businesses that can help foster creativity, innovation and community.

There is also the added benefit of being able to grow the size of your company within the coworking space without having to move to a new location as you can take on more or less workspace/office space in real-time as your needs change.

While we like to think that coworking is a great option for any company, we understand that it isn’t necessarily the right fit for everyone.

There are a lot of amazing options out there, so just make sure to consider what space will best support and promote your company culture and values for the future.  

~ Dylan

PS: If you haven't had the chance to check out our coworking spaces in Edmonton and Sherwood Park, Heather & I would love to show you around and answer your questions about coworking. Book a tour now.