Leasing and Purchasing Commercial Office Space

Types of Office Real Estate

Traditional Office Space

The traditional office space layout is typically associated with law firms and financial services companies. This type of space is well suited to providing knowledge workers with private spaces to where they can work undisturbed or meet with their clients in a setting that respects the confidential nature of their work. Traditional offices also include spaces for reception, conference, and other collaborative, shared spaces.

Because traditional office spaces often require multi-year leases of 3-5 years, they are best suited to companies that expect to remain in that location for the foreseeable future. The costs of moving can be significant, both in terms of the absolute financial cost and the significant disturbance inflicted on employees and staff. This speaks to the importance of investing in sound planning that adequately considers current needs and company growth over the life of the lease.

Creative Office Space

The creative office space is often synonymous with tech startups, but this open-plan office space has been finding popularity with businesses of all types in recent years. Often featuring wood floors, high ceilings, large windows, and minimal walls or private offices, these spaces can otherwise vary drastically in style and layout to meet the needs of lessees.

The creative office spaces take both a symbolic and practical approach toward removing barriers to collaboration. Removing walls enables a flattening of the layers between employees, managers, and leadership, enhancing relationships and providing a sense of transparency. This enhanced communication extends not just between individuals, but often across teams as well, which can dramatically alter the dynamics within an organization. Change to this type of space is not always well received, though.

For those focused on efficient use of space, the creative office space can provide a great deal of flexibility and will not typically be as costly to reconfigure. The open floor plans, with many employees situated around tables or in open space, tend to require a lower square foot allocation per person than you would find in a traditional office space with cubicles or private offices.

Coworking Space

Focusing on the requirements of small companies and startups that may benefit from flexible spaces and indefinite contracts, coworking provides for the use of desks, as well as access to meeting and breakout rooms as necessary. Terms may be available by the day or by the year and, while longer commitments may ensure lower rents for the duration, many clients may prefer to pay a premium and retain the flexibility.

One of the intangible benefits of the coworking space is collaboration and social interaction between tenants. Interactions may be organic or part of organized events, such as panel discussions or happy hours. These can be particularly beneficial in coworking spaces targeted towards specific types of businesses.

There are, of course, downsides to coworking spaces. Privacy is an inherent issue and there can sometimes be difficulty securing the necessary space, if necessary, to meet confidentially with clients. They may also lack the ability to accommodate growth, although the flexible terms should facilitate if that becomes an issue.

Shared Office Space

Often times, a company may have surplus space incorporated in their lease, perhaps after downsizing, and may offer to lease that space out to one or more other companies. This type of shared office space arrangement can benefit both companies by allowing the primary tenant to reduce their overhead, while providing quality space subtenant, as well as reduced rents and more flexible terms. This can provide some of the same benefits of coworking, while still permitting the subtenant to maintain a higher degree of autonomy.

Shared Office Space

Executive suites offer lessees a traditional office work space, typically in a suite or floor leased entirely as executive suites offering flexible contract terms. Units are fully equipped with phone and internet services, and user generally have access to shared conference, break rooms, reception areas and receptionist. Some companies also offer lessees the option of using suites in various locations on demand, which can be very use for professionals that frequently need office space while traveling.

What Does Class A/B/C Mean?

Beginning the process of evaluating office space for rent or purchase can be daunting, so the industry has settled on a basic classification system to facilitate comparison between properties within a market or submarket. This system, which applies one of four labels to an asset – Class A, Class B, Class C, or in possibly, Trophy – incorporates amenities, location, architectural features, and cost into the designation of the building, not necessarily the office space itself. This designation is not based on an industry-wide standard and may vary from one market to the next.

This system, which applies one of four labels to an asset – Class A, Class B, Class C, or in possibly, Trophy – incorporates amenities, location, architectural features, and cost into the designation of the building, not necessarily the office space itself. This designation is not based on an industry-wide standard and may vary from one market to the next.

Type A Buildings

Typically offering the prime location in a city, as well as excellent architecture and infrastructure, Class A buildings are often the largest and most attractive buildings you can find. The architecture may be modern or historical, but the design should be sell suited and adaptable to the needs of modern businesses.

Lease rates for these spaces will be among the highest in a given market, however they will usually provide everything that one could expect from an office space of the highest caliber. Moreover, for companies able to push past budget considerations, the space will provide an easily recognizable marquee presence.

Type B Buildings

While these structures are older than Class A structures, they still provide excellent amenities and management services for the rent being paid. These structures can also be ideally located, but they may simply not have the same level of quality or amenities that neighboring Class A buildings may exhibit.

The businesses that typically occupy these structures may be smaller or more constrained by budget. Many new businesses choose this type of office space because it provides them with more flexibility, perhaps offering the ability to acquire space that can accommodate their growth over the life of the lease or that simply allows the freedom to allocate their financial to better suit their needs as a company

Type C Buildings

When it comes to property management facilities including a lobby attendant, in-house cleaning, and so on, Class C buildings will often deliver very little. Rents are low and, in order to remain profitable, they tend to provide only basic amenities. That said, these buildings are often a solution for businesses where affordability is an overriding priority.

Although this varies by market, the general trend is we’re seeing is a decrease in the number of Class C facilities. It is difficult for them to compete with Class A and Class B buildings, as many companies would rather pay a bit more for the higher quality facilities and enhanced perception that goes along with it

The Decision to Purchase or Lease Commercial Office Space

Company owners are no doubt well aware that even minor decisions can have a significant effect on the bottom line. As a result, a major decision, such as whether to purchase or lease office space, may have significant financial implications. Of course, both may have advantages and disadvantages. Continue reading for details that will assist you in determining which choice may offer the best solution for your business.

Why Should You Buy Your Office Space?

When you're relatively certain that current needs will stay the same for a long time—say, 10 to 20 years, it may be time to consider looking at office space for sale in your market. Purchasing space in this situation could be a good move for a variety of reasons, including:

  • The opportunity to take advantage of tax deductions for mortgage interest, property taxes, and other expenses associated with ownership of the space

  • The long-term certainty, particularly in periods of low interest rates, of establishing a fixed cost by locking in your commercial mortgage

  • Additional cash flow that you may be able to generate by renting surplus office space

  • More advantageous tax planning through deductions for mortgage interest, property taxes, and other expenses associated with owning and maintaining the space

  • As the principal is paid down and the value of the space rises, the equity can be used as collateral to expand your business

Potential Issues to Consider When Buying Office Space

The financial investment needed to purchase commercial space can be a drawback in certain cases. Property ownership reduces flexibility and could become impractical as a result of business development, unforeseen market changes, or the need to downsize. You should also think about the initial costs of purchasing office space, which would require a large down payment, roughly 20-30%, as well as recurring property and maintenance costs. Some advisors also suggest that owners strongly consider whether investing money and time in a company rather than real estate is the better option.

Why Should You Lease Your Office Space?

Large and small businesses alike often choose to lease the space they want, and the advantages are obvious:

Leasing undoubtedly enhances adaptability. If you need more space or need to downsize, a lease has a definite endpoint and usually early termination options that allow businesses to more easily plan and budget for a new location.

Cash flow is critical and leasing helps businesses conserve their capital. Down payment costs are minimal and tenant improvement allowances may be an option for reducing buildout costs. Beyond that, you have security deposit, broker’s fees, and attorney fees, which should not be overlooked.

Unlike those for personal properties, lease fees incurred for office space are generally tax deductible.

Maintenance expenses are reduced. The landlord will usually be responsible for maintenance, renovations, and upgrades to the office building, depending on the specifics of the lease agreement. It will most likely be your responsibility to keep your leased space clean.

A lease agreement may allow a business to secure a more convenient location. Purchasing may not be an option under any circumstance in many high-end locations. In this scenario, leasing would be less expensive while still allowing you to access a high-end venue.

Potential Issues to Consider When Leasing Office Space

Leasing has two distinct drawbacks. To begin with, a lease typically incorporate scheduled rent increases regardless of actual market conditions, plus there will be additional costs when the lease expires even if the business remains in the current location. Second, leasing office space prevents a business from accumulating valuable equity in their company.

The circumstances of each company will determine if they can purchase or lease office space. Before you sign a lease or a mortgage, you and your financial and legal advisors should carefully weigh the options in consultation with your real estate professional.

Office Real Estate : Your Next Steps

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