Hoorah! Your startup is moving out of your home’s spare office and into its own office space. Pat yourself on the back and be glad your business is finally killing it. Now, the major task is to find an actual office. So, how do you do that?
In the era of Silicon Valley startups, office space kind of feels like a free for all. Fledgling startups forgo their own digs for shared open floor plans with like-minded companies or rented cubicles in coworking spaces (this is even trendy in high-rent areas like San Francisco, New York and Los Angeles). Others go the traditional route and rent or even buy their own offices, but this is a sizable investment. How do you know you’re getting a good deal, and how do you know what you need?
Not All Locations Are Equal
Before you even consider looking at properties, you need to know what you can afford. As of 2019, the average cost per square foot in the United States was between $8 and $23, but that number significantly changes if you’re looking in expensive areas like New York City or San Francisco. These are the two most expensive markets, where the average price per office worker is about $14,800 per year and $13,032 per year, respectively.
Flatly put: You may need to be headquartered in a major city to attract the best talent depending on the industry. Workers may not want to move their families to the middle of Idaho to work at a tech startup or ad firm when trendy, populated areas like Nashville, New York and Chicago have more options. Fortunately, some major urban areas have much cheaper real estate. For example, Atlanta and Dallas, which have booming restaurant and nightlife scenes, are considered the most affordable cities for office space, with an average cost of $4,194 and $4,618 per employee per year, respectively.
Depending on your business, you may not have much say in where your office is located. You should go where your customers are located, but there are ways to find the best deal within that location (no matter how absurdly expensive).
Learn Your Budget and Size
Budget is the prime concern, but it’s completely linked to size. Before you even reach out to a realtor, you need to understand how much your business can afford based on how much space you need. Nobody wants to bankrupt himself on a rent or mortgage that’s way too high. Similarly, you don’t want to be stuck in a cheap, cramped, decrepit office that makes your workers miserable when you could have something much better.
Budget is a tricky thing, and it’s hard to figure out what you can afford. It depends on the industry and your business’s expenses. Generally, businesses should spend 2% to 20% of annual sales on rent or a mortgage, which varies by industry. For example:
- Restaurants may pay 6% to 10%
- Auto shops may pay 12% to 13%
- Retailers may pay 5% to 10%
- Law firms may pay 6% to 15%
- Hair salons may pay 3% to 10% depending on location and foot traffic
Do some research about the average price per square foot in the area you’re considering and figure out what works within your budget. Generally, realtors suggest that you should have somewhere between 75 and 200 square feet per office worker.
Should You Lease or Buy?
To rent or to buy? That’s a question asked by small businesses across the country, and it’s really based on what you’re looking to get out of an office space and the volatility of your industry. In some expensive areas, buying a building may be completely out of budget. In other areas, you could find yourself with a cheap mortgage and a whole lot of tax deductions.
Buying an office space is beneficial because it locks in a fixed cost. You’re not surprised by a raise in rent, and you get all the tax deductions that come along with property ownership. Property can even become a major asset, appreciating in value as time goes on. On the other hand, owning an office space means your business will be less flexible and have higher upfront costs.
Leasing an office space can give you a prime property you could never afford otherwise — which does, in fact, attract top talent and keep employees happy. It frees up working capital because you’re not making a huge upfront investment and makes it easier to expand or downsize. Unfortunately, leasing has variable costs like rent increases, and you don’t have any equity in a property that you can later sell.
Open Office Spaces vs. Cubicles vs. Hybrids
Do you have absolute nightmares of staring at your cubicle walls under fluorescent lighting every day for the rest of your life? You spend the majority of your time at work, so it’s important that your office has a good vibe. In recent years, companies have been adopting open office floor plans and seemingly ditching the historically depressing cubicle, but is this the right move?
Open office floor plans allow for greater collaboration, which is excellent for a creative team, but many businesses find that a hybrid of open seating and cubicles is most beneficial. This way, workers can have private areas for meetings but also feel connected with the rest of the team. Beyond that, a 2018 study found that open offices don’t really promote in-person communication anyway, though it does increase digital interactions (shout out to anyone who has ever Slacked a person sitting nearby).
Another popular option is to lower cubicle walls so team members can communicate but still have privacy. People like this type of office because it allows them to have a private space that they can call their own.
Maximize Your Office Space
Your employees are generally working eight to nine hours a day, but your office exists outside of that time frame. You may want to consider leasing an office that allows you to utilize it for things outside of work. Consider an open space with movable desks. This allows you to transform your office if you’re hosting a networking event, happy hour, company party or educational opportunity.
Find the Best Realtor
You may think that all realtors are equal, but that’s not the case. They don’t always pull from the same properties you see listed online, and some may even have access to premarket properties that are an absolute steal. The best real estate agents for small businesses:
- Specialize in commercial real estate
- Specialize in working with tenants rather than landlords (they’ll be able to get you the best deal)
- Are established in your geographical area (this is what gives them access to the best listings)
To find a realtor, you may need to ask around. It doesn’t hurt to ask other businesses or search online. The ideal realtor will have experience with buyers in your specific industry.
Know the Real Estate Levels
Buying office space is a huge investment, and to help mitigate the risk and easily communicate throughout the buying or renting process, realtors have split up property into three major classes. These classes are so-called industry speak, so there’s a fair chance your realtor won’t ever label a property like this to you directly; however, knowing the classes will absolutely help you narrow down your search.
Each of the classes represents a combination of factors that includes:
- Age of the property
- Rental income
- Tenant income levels
- Growth prospect
Class A Properties
Class A properties are the highest-quality buildings available. Think about the kind of stuff you see on "Million Dollar Listing", though it’s not always a million dollars. It depends on the market. All class A means is that you’re getting the best crop of the market that’s generally rented to tenants with high income.
Class A properties typically cost the most, but that’s because they usually have no or very few maintenance issues. Generally, they’re professionally managed buildings that have been built in the last 15 years and include the top amenities. These have the lowest vacancy rates of all the classes but can fall into vacancy issues during a recession because of their high price tag.
Class B Properties
Like you’d probably expect, class B properties are a little less snazzy than Class A. They’re typically older and may be privately managed rather than professionally managed. Tenants have a lower income, and rent is generally lower.
This type of building may have deferred maintenance issues, meaning you’ll probably have to put in some light work. However, because these types of properties tend to be well-maintained, they’re generally considered a value-added investment opportunity.
Through renovations, class B properties can eventually be upgraded to class A properties, meaning they can be a sizable investment for startups that hope to eventually outgrow their office space. You can turn a profit by flipping this type of property, though it’s considered a riskier investment than class A properties.
Class C Properties
Class C properties need work. This type of property is generally the cheapest, which may be exactly what you’re looking for if you have the budget to perform some renovations and you think the neighborhood will eventually become trendy. As a rule, class C properties need the widest array of renovations, from major infrastructure changes to updating outdated styles, and they’re usually in a less-than-desirable location.
Class C properties are an investment risk, but it all depends on the type of business you’re running. Rising Silicon Valley startups may not attract the best talent if they’re buying a class C property in, say, Oakland rather than San Francisco, but having a Class C property that you use as a warehouse space may be a great budget-friendly option.
Consider Coworking Spaces
In recent years, coworking spaces have become a trendy option for startups that are in the midst of expansion but don’t yet have massive teams that can fill a traditional office space. This option is particularly beneficial for companies with remote teams that only need to meet occasionally or companies that aren’t yet sure if they have the permanent means to expand. It’s also a great way to surround yourself with like-minded professionals (never underestimate the power of networking!).
Generally, coworking spaces, like WeWork, let you rent desks, cubicles and meeting rooms on an hourly, weekly or monthly basis. If you don’t have a local WeWork branch or want to compare your options and search for the best deal, try using a website like LiquidSpace, ShareDesk and PivotDesk.
Don’t Make Your Employees Miserable
Happy employees are efficient, productive and loyal. At the end of the day, you need an office space that won’t make them miserable. Take a look at your core team members and try to find an office that improves work-life balance and quality of life. The perfect office space should:
- Minimize commutes
- Have free or cheap parking
- Have enough restrooms
- Be located near convenience stores and restaurants
- Have proper security
- Have reliable internet
- Foster a positive, collaborative work environment
It may not always be possible, but if you know your list of ideals, then you can figure out what’s a deal breaker. Also, a little natural light never hurts.
- Austin Tenant Advisors: What Should Your Annual Rent to Annual Sales Ratio Be When Leasing Commercial Real Estate?
- MarketWatch: Here's How Much Your Company Pays to Rent Office Space
- Realty Mogul: What Is Class A, Class B, or Class C Property?
- TODAY: Will Open Offices Ever Go Away? Here's What the Future Might Look Like
- Forbes: 11 Expert Tips For Finding The Perfect Office Space
- Nolo: How to Look for a Commercial Real Estate Broker
- Entrepreneur: 7 Expert Tips on Finding the Perfect Office Space For Your Startup