Commercial office space?

In My Humble Opinion
1

I am looking to expand my business next year, and am thinking about leasing or buying commercial office space. I’ve never looked into leasing space before, and although my office now is bright, airy, modern, and conveniently located with a view of the lake I live on, it is in the middle of nowhere, and not appropriate for daily employee incursions, or large meetings.

So, any tips, advice, the going rates? Anything I should be aware of? I am looking for something around 1000 sq ft or less. Is it better to buy, or lease? How about a small, free standing building as opposed to an office in a large building?

2

Going rates? That’s like asking how much a car costs. Do you want a Ferrari or a used Yugo? The company I work for has space from $8/square foot - $35/square foot. So that’s between $8000 and $35000 a year for a lease on 1000 sqft. But you’ve got to add to that CAM,taxes, and insurance. CAM is Common Area Maintenace. You’ll get those numbers seperately because they are based on your percentage of the total area of the building, whereas your rent is based on what you negotiate. (So, if CAM, taxes, and insurance is $2.45 it’s $2.45 for everybody, while your rent is negotiable. $2.45 x 1000 is another $2450 per year on top of your rent.)

If you buy your own building you will be soley responsible for the upkeep, landscaping, taxes, water, power, etc., etc. that you would be splitting with others if you’re leasing.

As to whether or not that’s good for you, only you and your accountant can answer that.

3

Thank you, I was wondering what CAM meant. What is the best way to look at possible properties? Is that what a leasing agent is? Or should I do it myself. And the rates are negotiable? Is it expected to be negotiated?What are the classifications of space? Office, industrial, professional, is there any more? How long are leases typically? I presume office condos are quite similar to residential condos?

4

I’m not familiar with Minnesota commercial space, but around here, there’s “classes” of space to contend with, and Minnesota probably has similar:

Class A full-service generally equates to a turnkey sort of operation in a spiffy new or recently renovated building - you pay a negotiated rate per foot, and that includes your space, CAM, trash/recycling collection, cleaning, water and electricity. Internet service may also be included - typically some negotiated fraction of a T1 line. To afford Class A, you pretty much need to be a mega-corp, or at least have mega-money. A whole lot of the dot-bomb companies sank too much of their fresh venture capital into office space that was far fancier than they had any rational need for.

Class B is going to be a somewhat “dated” building with less than stellar services, but should still be clean and reasonably modern. From your description above, this is probably what you’re in right now.

Class C is near the bottom, but still better than drawing chalk lines on a warehouse floor to represent walls. You’ll be in an older building that’s probably not seen enough maintenance done to it in past decades. Interior space will probably be punctuated randomly and frequently with odd nooks and crannies and structural columns. It will still be usable - just not necessarily the sort of place you’d want to try impressing clients at. OTOH, the “Hey, we’re not wasting money on fancy offices!” angle may be effective. Technology infrastructure in Class C may be charitably called “old” - one Class C office I was in still had the Western Union callbox - back in the day, you’d twist the knob and a telegram boy would run up and take your message to the WU office to be sent. The telephone wiring was not much better, but it did work.

Around here, at least, there’s another sub-category associated with any of the major classes called NNN or triple-net that incorporates yet more of the fees and charges like taxes, maintenance and insurance.

5

I’ve seen the term NNN. Does that mean that the extra fees are already included, or that they are additional?

And no, my fantastic office is off my bedroom. And it is fantastic. But not appropriate for other people to work in, or more than an occasional client to stop in.

6

I’m guessing NNN is short for what we call “triple net” which means that the tenant pays everything, taxes, insurance, maintenance, everything. I would guess that would mean that everything’s included, but you should definitely ask. I’m not familiar with the “classes” that gotpasswords mentions, but we lease retail space not office space so it may just be something that “office” people use.

Yeah, you might as well get a leasing agent because they can show you more space in a shorter amount of time than you could see on your own. They can also show you the space that’s in your price range so you don’t waste time. They’re making a commision, but it’s not costing you anything, it’s costing the landlord.

Yes, lease rates are negotiable, just like everything else (except fast food). Generally, we lease for a minimun of one year, and probably two years on brand new space. Probably, the first negotiating point that you’ll win is a “free rent” period, maybe 2-3 months. You may be able to negotiate a lower rate, obviously depending on the situation the landlord is in. CAM, taxes, and insurace aren’t negotiable, they’re just passed on to the tenants (they’re not marked up, the landlord isn’t making money on those).

I think the most important advice I can give you is to know the lease backwards and forwards once you find a place you like. Most tenants are at a real disadvantage here. We have 1000’s of hours invested in our lease, we know exactly what it allows us to do, and it’s completely one-sided (favored towards us ofcourse). Know what the lease says, don’t assume anything. Some points may be negotiable, some may not be, you won’t know until you ask as every landlord is different.

I’ll be happy to answer more questions too, if you have any more (and if you find my answers helpful!)

7

No, this is great 50M, I appreciate your and gotpasswords answers. Our business (which is construction) is going to be making a change in the next year, turning our focus from the mom and pop (mainly) subcontracting operation it has been for the last 10 years, with less than 10 employees, to focusing much more on homeowners and contracting directly, with many more people walking through the doors.

Because of this, we need to change our business environs. We need something more accessible to the main metro area, and professional.

I always learn information better when I can pick someone’s brain, and learn from their experiences.

Because of the nature of this business, could I almost go to a retail area, like a nicer strip mall? Is it more or less expensive in general----If a 1000 sq ft is in a specific location, am I going to pay more if it is retail or commercial? This company traffic will be similar in usage to a real estate office. A few clients walking in, but mostly sales and supes, acct, and production manager.

8

I negotiate and draft commercial leases for my company. While it’s not all that I do, or even a majority of it, I think I’ve done enough to get a good grasp of the US Market. Our rents average anywhere from $7.50/sqft to $50 sqft. The $7.50 is out in the boonies or suburbs of a major metro city like Chicago or New York, at least 1 hour away, in what’s called an industrial park. Typically, though, this is a much older industrial park (the closer to $7.50, the more like it’s 20 years old), and it’s typically undeveloped warehouse space. At $50+, you’re getting a posh office in a well-known, centralized building with lots of amenities (door man, security system, security officers, wood trim, all professionally decorated, etc.). Also, the higher priced leases are going to be the hardest to negotiate, and not to get too drawn into legal issues, but let’s just say that there should be insurance in order, and any modifications to the place should be yours to keep should you choose to keep it.

9

Oh, another question, should I expect to be able to substantially change the office? Or is it just more of an apartment type situation? Do I do changes, or do they?

And is it better to lease or to buy, from an investment point of view? Most I could probably swing would be a couple mil. I’m thinking I could buy a smaller building, perhaps even a 1-5 unit building for way less than that. Is it possible to rehab commercial buildings like residential, then utilize part of the space myself? Is it worth it? Is it very competitive to find reasonable properties?

Sorry I sound like such a moron, I just have no commercial background whatsoever.

10

[QUOTE=fisha]
Because of the nature of this business, could I almost go to a retail area, like a nicer strip mall? Is it more or less expensive in general----If a 1000 sq ft is in a specific location, am I going to pay more if it is retail or commercial? This company traffic will be similar in usage to a real estate office. A few clients walking in, but mostly sales and supes, acct, and production manager.
[/QUOTE]

Well, we have real estate offices in a couple of our strips, and a big residential builder has space in a strip close to where I live (but it’s not one that we own). So, yeah, I think it could look appropriate.

In general office space is more expensive than retail space, but that mostly has to do with a “skyscraper” vs “strip” and location. Downtown is obviously going to be more expensive than the suburbs. When we build a strip we don’t designate between “retail” and “office”, all the rents are the same. If you go into a large building downtown, then they’re all going to be “office” except for some of the street level spaces that have outside entrances. Being “office” isn’t what makes it expensive, it’s the location.

You obviously know your local market better than I do, but we generally build 1200 or 1500 sqft units. Just keep that in mind for pricing, you may not be able to find 1000 sqft.

11

The 1000 number was pulled out of my ass. 1200 or 1500 is entirely doable. Basically need two-three offices, a communal area, and a reception area as well.

12

[QUOTE=fisha]
Oh, another question, should I expect to be able to substantially change the office? Or is it just more of an apartment type situation? Do I do changes, or do they?

And is it better to lease or to buy, from an investment point of view? Most I could probably swing would be a couple mil. I’m thinking I could buy a smaller building, perhaps even a 1-5 unit building for way less than that. Is it possible to rehab commercial buildings like residential, then utilize part of the space myself? Is it worth it? Is it very competitive to find reasonable properties?

Sorry I sound like such a moron, I just have no commercial background whatsoever.
[/QUOTE]

Well, first of all, a moron is someone who just signs a lease without reading it and asking questions. So you’re already saved yourself from being a moron. That’s what this board’s all about.

Yes, you can change the space. We lease a “vanilla box shell”, (other places have different terms) which means that you get four walls, a ceiling, and a floor. We put in the drop ceiling, some places don’t. Walls are ready for paint, and floor is ready for carpet or whatever you want to put down. Of course, if you are not the first person to lease the space then it will probably already be painted and have floor covering, and maybe some demising walls. A demising wall is a non-loadbearing wall that goes up to the ceiling grid. You can demise to your hearts content as far as we’re concerned - as long as it meets code - because you’re paying for it.

As for buying vs leasing - that’s all about your risk tolerance and your bank account. A couple words of caution - We’re in this business, it’s our job to know the market(s), how much to charge, what the lease need to say, etc. etc. You better learn a good bit of that quickly before you go buy a 5 unit building and try to lease 4 of the spaces. What are you going to do if they don’t lease up? What’s the occupancy rate for where you’re looking? It’s just a whole lot of knowledge that you need to get your hands on before the decision can be made. Of course, people buy their first building every day. Also, you might be able to find a building that’s for sale and has one office vacant for you to move into. That way it would already be leased ( you just have to worry about keeping it leased) you can move into the vacant space, and you buy the building at a discount because it’s not fully leased! (Of course, you don’t tell them that you’re planning on moving in, that negates the “bad” part of it not being fully leased.)

13

That’s a good idea. What does a leasing agent specifically do for me? I presume their siilar to a real estate agent. Will they also have knowledge of places for sale, or would that be an agent specializing in commercial property?

14

I don’t know much about leasing agents and the like. I work for a medium sized development company. We lease our own shopping centers, but we don’t “show” tenants space other than our own. My impression (because sometimes other agents show our space to potential tenants) is that it works similar to residential real estate.

I have friends that work for big brokerages and I’m always amazed at the level of specificity that they use. So, yeah, I think that one person would show you space for lease, but a totally different person would show you buildings that were for sale. I’m sure a big part of this is how big the brokerage is, how big the city is, etc. The city I live in is about 1 million people and we have 2 or 3 of the national brokerages here. I’m sure it works different in NYC or Mayberry (trying to think of a small town that everyone would know, pretty much impossibe by definition, isn’t it?)

I know that was pretty vague, but hope that it helps some more.

15

Before you do anything, check with your municipal office. Tell them the locaton and what you are planning to do with it. If you find out three months later you have done anything they don’t approve of, the fines are hefty.

I speak from experience.