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.
Today, 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
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
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 firstname.lastname@example.org or call him at (415) 765-6897. You may also check out his website, http://www.commercialspacefinder.com/.