News & Research Archive

How Much Rent Can You Afford?

Sep 05, 2012

 

San Francisco has been experiencing incredible increases in commercial rents over the last two years - rents in most areas have jumped over 40 percent. Led by a tech startup boom, these rent increases are wrecking havoc on traditional businesses that now have to compete to secure new office space or keep their current office space if they wish to renew their leases. Tech firms are also struggling, as they are often times unfamiliar with the process of securing space and how drastically rent can affect their bottom lines.

Almost all businesses start off by trying to address how much space is needed to conduct business but the first question to be addressed should be how much rent these businesses can afford based upon their income. When meeting with prospective clients I never get the answer to that question from the start, I typically find myself asking the question instead.

As a principal at my firm, I appreciate that it is impossible to generate income without a place to conduct business. I also understand that when a move is anticipated, the first step is to figure out the number of current employees that will be moving and how many new employees are expected in order to place them effectively into a proposed space layout. However, if the income needed to support that layout isn't already there, what needs to be determined is whether the business plan as it stands is viable or needs updating.

The general rule of thumb for figuring out an affordable rent is an allowance of 6-8 percent of gross income assuming that the business is run as a home office, where all administrative services, i.e. accounting, management etc. are handled at the same location. If those services are handled elsewhere, rent can be pushed up to 10-12 percent.

office rent in San FranciscoToday, the average size commercial office transaction in San Francisco is 3,200 square feet, allowing 200 square feet per person that designates an office of sixteen people. Assuming an average rent of $40.00 per square foot on a fully serviced basis, a typical rental rate is $128,000 per year. That means, in order for a business to fall in a rental safety zone, that business would have to produce a gross income per year of over $2,150,000. With tech startups that are still in research and development mode and not yet profitable, this formula is extremely important to understand because it needs to be properly built into their proforma for funding. For existing businesses, it is important to fully study and determine whether future rents measure up against potential income.

Given that San Francisco is currently in its own financial bubble while the rest of the country continues to struggle, mature businesses are bravely gambling on the hope that our current localized growth will continue against the backdrop of our national and international financial insecurities.

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Written by: Hans Hansson

E-mail: hans@starboardnet.com


Hans Hansson is President of Starboard TCN Worldwide Real Estate Services as well as a member of the Board of Directors for TCN Worldwide Real Estate. Hans has been an active broker for over 27 years in the San Francisco Bay Area and specializes in office leasing and investments. If you have any questions or comments please email hans@starboardnet.com or call him at (415) 765-6897. You may also check out his website, http://www.commercialspacefinder.com/.

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