When you are in a hot market like we are experiencing in the San Francisco-Bay Area, affordable office space is hard to come by. According to Colliers International Research and Forecast Report for San Francisco in 2016, overall weighted office rent averaged about $80.42 per square ft. for class A space, a 9.5 percent increase from just last quarter.
Most clients I see today look for office space and rush the process. They want to secure a new space as quickly as possible, rather than taking the time to determine if the space is truly affordable for their business long-term.
I see this especially ring true with most tech tenants we work with. Often times, these firms are newly funded and in development mode. Therefore, rent is not the most important factor for them.
These tenants are focused on securing a space quickly so that they can hire the talent they need to launch their business and start making profits. Regardless of the reason, at the end of the day, rent needs to be paid. And if rent is too high, it will impact a business’ revenue stream along with every other aspect of the business.
As a rule of thumb, I have always determined the amount of rent a business is able to pay is typically between six to eight percent of its gross sales. However, today’s office layouts have changed so drastically to the point where there are more people situated in less space. In years past, the rule of thumb had been 200 square feet per person. That was based off an office space that was comprised of 60 percent private space and 40 percent of open space. It also includes a good share of conference rooms, kitchen area, and storage areas.
Today’s office arrangement looks quite different. With less use of phones and more use of emails, instant messaging, and texting to conduct business, the need for private office space has reduced significantly. Also, companies today have a collaborative work culture. Instead of isolating cubicles, workstations have been replaced with long conference-style work tables, which are much more conducive to collaboration and conversation. As a result, businesses are squeezing more people into less square footage.
Today, it is not uncommon to see offices with less than 150 square feet per person or close to the minimum legal square footage of 100 square feet per person.
To address growth, I often hear clients tell me that they will just add more chairs to their existing workspaces, rather than moving to a larger space. Clearly, this is not a plan to make their businesses more efficient, but really it’s just a sign of not wanting to deal with the moving process at all. Although conventional businesses are a different story, their approach to growth are similar. These businesses are more focused on remaining profitable and their increasing their bottom line. Squeezing in more talent while working in smaller spaces does ease the burden of higher rent rates in the Bay Area.
Five years ago, the average rent for Class A office space in San Francisco was only $32.00 per square foot; a much more affordable price tag than today’s average of $82.00 a square foot.
Today, the average square footage office user in San Francisco is only 3,000 square feet, holding 15 people. Five years ago, the annual rent was only around $96,000 (or $6,400 per person). Fast forward to present day, assuming 150 square feet per person, a 3,000 square foot space holds 20 people, which puts today’s annual rent at around $216,000 (or $10,800 per person).
Conventional businesses have not yet seen enough multi-digit growth over the last five years as a reason to absorb such an increase. Certainly, with real signs of the market softening, they cannot count on this level of growth to continue.
Tech companies, particularly startups, haven’t cared about cost of rent in the recent past. Why? Although they were forced to sign longer-term leases, some with three to five years of commitment, their business model for success was not based upon profitability. It’s been based upon the ability of the business to get acquired or go public. But as capital continues to dry up and firms are struggling to continue to exist, they will need to be more cautious about their rental costs.