Hunting for a commercial real estate space is no easy task, and once you’ve found your dream spot, you’re likely hoping to lock it down fast. But how does the rent per sq ft work?
Unlike other leases, it can be complicated to figure out how to calculate commercial space rent and figure out the total rent per month. With many factors that come into play when figuring out the rental cost per square foot, taking the time to understand just how these works are essential. To help you calculate rent per square foot, our expert team at 620 N LaSalle is here to break it all down.
The Benefits of Commercial Tenants
Okay, first things first - what’s the benefit of signing commercial tenants in the first place?
Since commercial leasing can be a bit more complicated, some property owners can be tentative about getting into this industry in the first place, but it is well worth a bit of research and investment. With many commercial property tenants running businesses, they are more knowledgeable about leases and will hire professionals to handle the process. With this, contracting a tenant is a more seamless process that’s handled by professionals.
Additionally, with many commercial spaces focused on large professional offices, shopping malls, and retail space, many of these tenants are looking to stay for multiple years on end. With this in mind, a landlord leasing commercial space is likely to have consistent, reliable tenants for years on end, ensuring their income remains strong and dependable through the years.
As if this isn’t reason enough to get into commercial real estate, in long-term leases at commercial properties, tenants are more likely to handle the repairs and improvements. This takes a great deal of burden off your hands, and if you maintain a well-kept property, you will ensure tenants are happy for years.
3 Crucial Lease Terms to Know
Alright, so we’ve convinced you to get into commercial real estate. But now it’s time to tackle the lease. Leasing a commercial property isn’t as simple as residential units, especially with multi-tenant locations. When contemplating how to calculate commercial square footage cost factors, here’s what you need to know first.
Rentable Square Feet
Rentable square feet is the amount of space a landlord can charge for. Typically, commercial property owners follow the standards of the Building Owners and Managers Association International to calculate these costs based on the rentable square footage.
Usable Square Feet
Usable square feet refers to the amount of space being leased after deductions are made from the total square footage due to space that the tenant does not have access to. Some spaces aren’t usable that tenants still have to pay for, like interior walls, hallways, and building lobbies.
Building Load Factor
Last up is the building load factor. This is the percentage of common areas in the building that can be factored into and added to a lease agreement. So, let’s say there’s an office building that is 75,000 square feet and has a 5,000 square-foot lobby. In this case, the load factor would be:
5,000 sq foot lobby / 75,000 sq foot building = 6.6%
With this, the additional square footage is added to a tenant's lease to account for the common spaces they will take advantage of. Thus, with each lease, a 6.6% load factor will be added. How does this work? Imagine a tenant has a 1,000 sq ft office. With the added load factor, they would pay for 1,066.66 square feet. This is how you can calculate rent per square foot when accounting for the total building load factor.
How to Calculate Commercial Square Footage Cost
Now, let’s explain just how to calculate office rent per square foot.
This process isn’t the most obvious, especially since rental square footage rates are typically quotes per year, not per month. So, if you have a rental rate of $60 per square foot for a 2,000 square foot office, you need to multiply the two together to find your annual rental cost. Then, to find your rental cost per square foot per month, divide that number by 12. With this example, your monthly rent would be $10,000. Now, with this number, you can evaluate if the property suits your needs.
What Impacts Your Overall Rental Square Footage Rates?
With so much that goes into rental cost per square foot, you can imagine that there are quite a few factors that can impact the rate. From lease structures to usable and rentable square footage, here's what you need to know to better understand how to rent per sq ft is determined in commercial real estate leases.
Usable vs Rentable Square Footage
Depending on the way the building is designed and the number of tenants and the size of the common area, you may receive a quote based on the usable square footage or rentable square footage.
When it comes to usable square footage, this refers to the space that you solely are entitled to occupy. On the other hand, rentable square footage refers to the entire space you can use in a commercial location, thus adding the common area to your rent.
As we explained before, rentable square footage is found by taking the square footage used by tenants and dividing it by the total square footage for the entire property. Once this is found, it’s added to each individual’s square footage for their individual space. This way, tenants are responsible for paying for common locations, like lobbies, gyms, and other common areas they may utilize on top of their single office or business space.
However, there are some cases in which rentable square footage methods are not used to calculate rent per square foot. For instance, in cases where retail tenants occupy their own space with their bathroom and other elements, they will not be subject to the additional cost of rent per sq ft for the common spaces. Thus, this add-on is most common for those in office settings.
In addition to other considerations, the actual structure of a lease will impact the total rental cost per square foot. With commercial leases, these lease structures include a full gross lease, modified gross lease, triple net lease, and double net lease. Here’s what each entails.
- Full Gross Lease: With a full gross lease, the tenant is only responsible for the base rent. In this situation, the rent may be higher so the landlord can account for operating costs.
- Modified Gross Lease: In a modified gross lease, the tenant is responsible for their base rent, as well as some of the operating costs. As part of the lease, the landlord will define just what operating costs the tenant will need to cover, and which the landlord will handle.
- Triple Net Lease: A triple net lease, also referred to as NNN, is a situation where the tenant is responsible for their base rent, plus all the operating costs. This will include everything from insurance fees, to taxes, and the majority of the maintenance fees. This is mostly used in cases of long-term leases, which in commercial real estate usually refers to a lease of at least 10 years.
- Double Net Lease: A double net lease is a lease that requires that a tenant pays their base rent, plus taxes and insurance fees.
Beyond those rental square footage rates, other factors will increase (or decrease) the cost of the rent. From the location of the space to the amenities a building offers, various elements can affect total rent.
The other factors that will affect total costs after rental cost per square foot include:
- Location: Especially in the Chicago area, different locations can lead to very different rental costs. If you are looking for an office in the heart of the loop, your rent will be much higher than that of a lease more north in Lakeview. The location you choose will be determined by what’s most convenient and desirable for employees, but this can have a significant impact on the final costs.
- Building Class: Different office building classes will also impact the final rental cost. For instance, a prestigious Class A building with all the amenities will cost more than a Class C office that may be older and located in a less desirable part of the city.
- Amenities: There are a lot of additional amenities commercial properties offer. From gyms to showers, common area workspaces, patios, and more, rent will increase as you pay for these additional perks on top of your office space.
- Lease Flexibility: Not ready to commit to a space long-term? We understand, but it may cost you. While a shorter lease will offer your business more flexibility, it typically comes at a higher rate to account for turnover and the risk that comes with that.
While navigating how to calculate commercial space rent can feel like a daunting task, once you understand the ins and outs and different factors, it isn’t as complicated as it seems. With a few simple equations and knowledge of the various impacts on your total rent, calculating the rental cost per square foot can be a breeze, and well worth the time to figure it out before signing along the dotted lines.
Whether you have additional questions about how to calculate office rent per square foot or are ready to explore the spaces at your disposal in the Chicago area, our team at 620 N LaSalle is here to help. Offering a range of office spaces with all the amenities to help your business thrive, we feature some of the greatest commercial property options you can find in Chicago. To explore our options, contact us today and schedule a tour to learn more.
Table of Contents