Starboard Commercial Real Estate

Hans Hansson | September 26, 2006

In 1984, San Francisco Class A office rents were in the low 50s. Twenty-plus years later, these same buildings are hitting the 30s to mid-40s. Rents in 2006 are lower by 15-20% than 20 years ago, not including inflation factors.

Have you ever wondered how U.S. inflation figures remain so low when prices for goods and services such as gas and health care continue to skyrocket? Office rents play a role in this equation-low office rents allow businesses to enjoy more income on their bottom lines. Given the great deal that businesses have enjoyed for the past two decades, the current 15% annual increase in rent has alarmed many people.

In 1984, the average tenant improvement allowance to build out a space to "turnkey" condition was approximately $35 per square foot. Today average build-out costs from shell are close to $55 per square foot-and they're even higher if glass and millwork are in abundance in a layout.

In the midst of worrying about how to absorb all these higher costs, business owners might ask, what is considered a fair percentage for a business to allocate to rent as compared to income?

The general rule of thumb is that a business should assign 6-8% of its projected gross income toward rent for office space, allocating 200 square feet per person. In addition, business owners should add a "load factor" of 15-30% that covers square footage that rests in common areas of a building. Thus, if a business employees 15 people, it might need 3,000 square feet (15 employees times 200 square feet per person) times 1.2 (load factor), or roughly 3,600 square feet rentable. With rent costing 6-8% of revenue, assuming $2 million in revenue, a business owner should expect to pay $120,000-$160,000 per year, or $33-$44 per square foot. This would allow the business owner to secure a solid Class A or B building without stretching the budget.
Posted 13 years, 2 months ago on September 26, 2006
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