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What Goes Into Determining Commercial Real Estate Prices Per Square Foot?

November 3, 2020 | by
Reviewed by real estate expert Jonathan Wasserstrum

When you are quoted a commercial real estate price per square foot by a broker or a landlord, you may be wondering: What does this rate include? How is it calculated? What is my total office rent?

There are a few variables that impact your rental rate, as well as what that rate includes. Read on to learn how to calculate your rental rate based on price per square foot and what factors impact your overall rental rate.

How To Calculate Your Rental Rate

When given a price per square foot, it isn’t immediately clear how much that will cost you on a monthly basis. Prices per square foot are usually quoted as the price per square foot per year for a given space. (In some states like California, prices per square foot are quoted in monthly terms.)

If you have a rental rate of $50 per square foot for a 3,000 square foot space, you would multiply $50 by 3,000 to get your annual rental cost, and then divide that by 12 to get your monthly rental cost. For this example space, you’d be paying $12,500 per month as your base rental rate. But this calculation doesn’t tell the whole story, so it’s important to understand what this $12,500 gets your business.

What Impacts Your Overall Rental Rate

There are a variety of factors that go into determining a commercial real estate lease rate — it’s not a one-size-fits-all calculation! Let’s dive into what impacts your rental rate quote, and go over some key terms you’ll need to know.

Usable Square Footage versus Rentable Square Footage

When you’re quoted a commercial real estate cost per square foot, this can either be on a Usable Square Footage (USF) or Rentable Square Footage (RSF) basis. Usable Square Footage refers to how many square feet you’re actually using as a company. This will encompass any designated space that is only for your business, such as storage space or private restrooms. Rentable Square Footage, on the other hand, encompasses both Usable Square Footage but also takes into account any space that you might share with other businesses in the building — for example, shared restrooms, corridors, and reception areas.

In order to calculate rentable square footage, commercial building owners will determine what proportion of common space there is in a building — this is called a common area factor. In a commercial building that is 100,000 square feet with 25,000 square feet of shared space, the common area factor will be 25 percent. Each tenant will then pay a proportionate share of rent for the common areas. If a tenant’s space in this example building is 5,000 USF, they will add on 25% of 5,000 square feet in order to find the RSF figure. So in this case, the tenant will be responsible for paying for 6,250 square feet.

It’s important to understand whether a space’s square footage is quoted to you in terms of Usable Square Footage or Rentable Square Footage. Otherwise, you may be quoted a certain price per square foot only to realize that your lease rate encompasses common areas, so your business has less dedicated space than you realized. (To calculate how much dedicated space your business will need, check out our Office Space Calculator.)

Lease Structures

The structure of your lease will also impact your total rental rate. Here are some of the most common commercial lease structures and what they entail:

Full Gross Lease: Tenant is only responsible for the base rent. This may mean that the landlord hikes the monthly rental fees in order to pay for any operating costs.

Modified Gross Lease: Tenant is responsible for the base rent and some operating expenses. The landlord pre-defines what operating costs they will pay for and which ones the tenant will be responsible for. This structure is similar to a residential rental lease.

Triple Net Lease (also referred to as NNN): Tenant is responsible for the base rent as well as all operating costs — i.e. taxes, insurance fees, and most (if not all) maintenance fees. This lease structure is most common for long-term leases (10 years or more) in which a company is the sole building tenant.

Double Net Lease (also referred to as NN): Tenant is responsible for the base rent as well as taxes and insurance fees.

Other factors

There are a variety of less technical considerations that will factor into the price per square foot of your commercial rental. Here are some of the main things that can impact your property rates:

Location: The classic real estate mantra “Location, location, location!” continues to ring true. Even within expensive commercial real estate markets like New York City and San Francisco, there are submarkets that are more costly than others. In New York City, for example, you’ll get more bang for your buck if you choose to rent in the Financial District or Long Island City than if you were to rent in Hudson Yards or SoHo.

Building class: Commercial building classes are a way of distinguishing how high-quality buildings are. Building classifications are generally broken out into A, B, and C and take into account infrastructure, amenities, location, and price. If you are renting in a Class A building, you’re paying more per square foot because you’re getting updated construction and infrastructure, as well as top-of-the-line amenities. A space in a Class C building will be cheaper per square foot, but will not have as many bells and whistles.

Amenities: If your commercial building has extra amenities like doorman services, concierge services, parking, lounges, this will likely be reflected in your lease rate — either in your base rate, or as an additional fee.

Lease flexibility: Sometimes lease flexibility means that you may pay more on a month-to-month basis than you would in a comparable space with a more rigid lease. This arrangement is often worth it for tenants who aren’t looking to occupy space for more than a few months. However, if you’re looking for space on an annual basis, it’s best to sign an annual lease. Still, this isn’t always the case — there is a variety of affordable, flexible options available to tenants on the market today, such as office subleases or PivotDesk.

Talk to a broker

There’s a lot that goes into calculating commercial real estate costs per square foot. Navigating leases and rental rates can be tricky without an expert eye, so we recommend always enlisting the help of a tenant-rep broker when negotiating a commercial lease in order to get a fair market value. Contact us today to get started on your search.

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