REoptimizer^® Blog

If you think that the only occupancy cost that matters is rent, you could be in for a big surprise. The net rent that you pay is only a small part of the cost of occupying commercial real estate space. Not only can the other costs add up to more of your rent, but they can also be unpredictable from year to year. Beyond the Common Area Maintenance (CAM) charges that many buildings levy, here are some of the line items that could apply to your business.

Commercial real estate is one of the largest expenses for any company, so having a key understanding of what it’s costing you to occupy spaces that you rent is vital to managing expenditures. It's not enough to simply know what your total occupancy cost is if you want to find places where you can reduce costs. Using the following metrics can give you a better understanding of whether or not your commercial real estate portfolio is costing you too much.

The five highest "Occupancy Cost " markets in the United States and Canada all feature average gross asking rents of over $35.00 per square foot. Given that these rents are market wide averages, your company could end up experiencing even higher office rent expenditures. However, if you need to be in any of these markets, there are ways to manage costs and make even the most expensive space more affordable than it seems.

With demand for logistics space increasing and shifting needs for warehouse locations, actual warehouse occupancy cost is growing even faster than rental rates. Luckily, the right strategies can help you to keep those expenses down and maximize your ROI on your warehouse expenditures.

Calculating your occupancy costs correctly is important for managing the expenses of your company. Unfortunately, many companies underestimate their occupancy costs or forget to consider factors that contribute to the overall cost of occupying a commercial space. To avoid making mistakes, be sure to consider the following when calculating your occupancy costs:

With many markets achieve rents at or above those of the pre-Great Recession peak, you have probably noticed your company's overall occupancy cost growing. While portfolio optimization and better strategy can help to mitigate some of the cost increases, if you're in a high cost market, you are probably still going to be effected. Take comfort knowing that our #1 most expensive market barely cracks the global top 10, though.

Occupancy costs are much more complicated than just adding up rent and CAMs. The details that make up those calculations can add hundreds or thousands of dollars per month to what it costs to use a given space. Here are some tips that you can use when you are reviewing lease proposals.

1.  Rethink Your Glass Line

Having an office space with extensive window coverage can make it a more pleasant place to work. However, if you're responsible for the cost of your space's actual energy usage, that generous glass line could lead to higher occupancy costs. In winter, it's good to note that the best windows are usually worse insulators than the worst calls, leaving you responsible to pay for additional heating. In summer time, all of that sun generates need for additional air conditioning, further boosting your cost per square foot.

2.  Choose NNN

Over Full Service With StopsWhile we're talking about energy costs, the good news is that they don't have to go up. Advances in lighting, computer technology and in space design all make it possible for you to reduce your energy consumption, year over year. With a triple-net lease, your costs fluctuate with your usage so you get the benefit of the savings.

Full service leases with expense stops, though, don't necessarily give you the ability to benefit from all of your savings. Once you hit the minimum rent, your landlord pockets any expense reductions. Plus, when expenses go back up, the full service lease works just like a triple net one since the expense stop means that you pay the increases. It's best to just roll the dice and take a lower base rent with an NNN provision.

3.  Understand Management and Admin Charges

Many leases include provisions that allow a landlord to recoup some or all of the cost of their management. Others allow landlords to add a percentage fee to the total common area maintenance charges as a form of management fee. Read the lease carefully to see which one of these you have to pay. Sometimes, the landlord gets to double dip and charge both.

4.  Cap CPI Increases

Landlords love automatic rental increases that are tied to the Consumer Price Index, since they feel it gives them better inflation protection. With one tweak, though, they can actually be a powerful tool to protect you from spiraling rent costs.

To turn the CPI increase around, add a cap. For instance, your lease may say that your rent goes up by the CPI, up to 3 percent per year. If inflation is 3 percent, your rent goes up 3 percent, but if it is 6 percent it still only goes up by 3 percent. On the other hand, when inflation is low, your rent can go up by less then 3 percent. In either case, you win.

5.  Calculate the High Cost of Low Rent

Finally, the biggest hidden occupancy cost of all may very well be low rent. If you find a building that is significantly less expensive than the competition, there is probably a reason. Leaving obvious factors like undesirable locations or low finish qualities aside, low rent can be a sign of a building that is inefficiently laid out. If you spend 10 percent less for rent, but you need 20 percent more space, you end up behind. Low CAMs can be a sign of inadequate maintenance. While you save today, you could end up with skyrocketing repair bills in the future. In commercial real estate, a deal that looks too good to be true frequently is.

Other great Commercial Real Estate articles:

Parking and Your Office Lease

Commercial Lease Renewal Myths... Busted!

6 Ways to Reduce Occupancy Costs

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