Office space has a huge impact on your business. Your office space lease will be one of the biggest financial commitments your company will make. Office space affects company culture, employee moral, recruitment and retention. Most of all, it affects cash flow, and a bad decision can put your startup at risk.
I’ve been in your shoes many times over the years.
Business momentum is accelerating. I can see a fundraise 6-12 months down the road, and that will turn everything up to 11.
I look around the office. We are at 35 employees, hiring 3-5 new people every month. Almost every desk is full. I can certainly squeeze more seats in there, but clearly it’s time to start thinking about new office space.
I pick up my phone to my broker. We set up a meeting, and I explain our current situation.
“Great,” he says. “Let’s think about how much space we’re looking for. How many people do you think you’ll have in 5 years?”
What kind of crazy question is that?
Here we are living month to month. The budget that my board signed off on doesn’t make sense any more, and it’s only February. Momentum is great, but we’re still figuring a lot of things out. The market is moving 100 miles an hour, and it seems like a new potential competitor springs up every week. I don’t know what we’ll look like at year end, never mind 5 years from now!
And yet, with standard office leases in many markets having 5 or even 10 year minimum terms, this is the kind of question you’ll get when you kick off your space search process.
The good news is that there are steps you can take to protect your business and your cash, and end up with an office space lease that isn’t an anchor on your rapidly evolving business.
As you move through the process, these questions should be front and center all of the time:
- How Do I Get Out of This Lease If I Fall Short of Growth Expectations
- How Do I Expand If I Grow Faster Than Expected
- Will My Employees Be Happy Here
- How Much Will It Cost Me to Get This Space Ready to Move In
- How Will The Space Affect Recruitment and Retention
Start Thinking About Space Early, and Then Never Stop Thinking About It
Finding office space, preparing it for your team, and coordinating the actual move will take longer than you expect. Give yourself the time to do it right. As is true with most things in life, you’re not likely to strike the best deal if you’re panicked and up against a looming move deadline.
It Can Take Over A Year to Get Into the Space You Find
I’ve found the perfect sublease, furnished, cabled and almost ready to move in, and it still took us six months to move in. Many sublease deals are done while the existing tenant is still in the space. You’ll have to wait for them to move out, and then do the work needed to get the space 100% ready for your team to move in.
If you do a direct lease with the building and need to do a full buildout, it can take over a year from exectuting the lease to timing the move in.
Everything takes longer than you expect. Plan for that in advance. And always be laying the groundwork for the eventual next move.
Get Professional Help From the Start
A good commercial real estate broker is going to save you a lot of time and money, and will help you navigate the market. The right broker is going to get to know you and your business, and what your priorities are when it comes to finding the right space. While the office space market in most cities is huge from the outside, a good broker is going to know the buildings, the owners and timing of space coming onto the market. The best brokers will get access to space before it even hits the market. And that’s crucial, as the best space goes fast.
Your office space needs are not a one time deal. This is something you’ll deal with for the life of your company, so build a relationship with a good broker early.
Your broker is going to be paid for by the landlord, so you’re not going out of pocket for their help.
Your second partner should be a decent architectural firm, who will be able to help you optimize your space plan. A good architect can take even the most humble of spaces and help you turn it into something you and your team can enjoy. You can ask them to give you a price quote specially for space planning work, only as needed, so that you can tightly control the cost on this up front work. If you need real design work after you have a lease, they can bid on that separately.
Doctors make the worst patients, so you shouldn’t do your own space search without some experienced help.
How To PIck The Right Space
The right space is going to give you optionality as your business needs change, while also serving as a good home away from home for your employees.
Class B Building in a Class A Neighborhood
The rule for buying a house is to buy the worst house on the best street in the neighborhood. The same thinking applies to your office space. Well, maybe you shouldn’t pick the worst office space. Your employees might not appreciate that.
Focusing on location over a Class A building can pay huge dividends over time. Benefits include:
- Lower cost per square foot
- Better neighborhood amenities for your team. Think restaurants, bars, grocery stores, fitness club
- Better access to transportation. Think about the commute of your staff, and make it as easy as possible for as many as possible to come in each day. This has a huge impact on their quality of life and ultimatley their happiness.
- Easier to sublease down the road if you need to move, as the lower rent in the better neighborhood will easily attract similar minded early stage companies.
Find The Unicorn: The Plug and Play Short-Term Sublease
You can really minimize terms and the cost of building out a space if you can find the right sublease. The best subleases tend to hit the market and get snapped up fast. This is where a good broker can become a real asset.
A sublease from a company that is similar to yours is going to have a similar design asthetic, which means you can move in with very little work. The right sublease will come furnished, cabled for power and data, and with a reasonable amount of term. But don’t take any of that for granted. You still need to do all of the homework suggested here to make sure you don’t end up stuck a in a sublease dealing with someone else’s problems. Since you won’t generally have a direct relationship with the building, if things really go wrong, resolving those problems can be more difficult.
The Right Size Office Space
Take your best shot at figuring out how much space you’re going to need. Learn the difference between Rentable Square Feet (“RSF”), which is what you’re paying for, versus Usable Square Feet (“USF”), which is your actual office space that you’re planning for.
Figure out your target density. More established, profitable companies might have target density as high as 200 or 250 square feet per person. That’s luxurious by my startup standards, and I’ve typically targeted 150 USF at the start of the lease. I’m willing to get down to 100 – 125 USF toward the end of my lease term before I feel I have to move because folks are getting uncomfortable. That’s startup life.
This is far more art than science. You have to make your best guess as to what size office you need, and then find the best deal that gives you the most optionality when your needs change.
This is where most mistakes are made, either by taking too much space, or too little, with inadequate flexibility in the office space lease terms.
Room For Growth
One of the other benefits of a Class B building is that they often tend to favor many smaller tenants versus fewer large tenants in their building. They view that diversification of tenants as a way to lower their risk, and spread out lease terminations over a period of time.
The benefit to you can be that those smaller blocks of space represent future expansion options. Negotiate a right of first refusal (“ROFR”) on future space in the building if you can. Certainly fight for ROFR on any spaces contiguous to yours. Continguous space is pure gold. Don’t let it slip by without a look.
During my seven years at Thrillist/Group Nine, we went from 5,000 square feet to 38,000 square feet. And we did that block by block, gobbling up spaces as tenants left. Almost all of this space ended up being contiguous, either on the same floor or connected by the same stairwell. This helped the employees avoid feeling isolated in any particular space, while giving us the flexibility we needed.
Space That’s Easily Divided
Expanding through taking addtional smaller blocks of space gave us a huge amount of flexibility. Any of these spaces could be chopped back down to 3,000 – 6,000 square foot spaces I could sublease if I needed to rapidly downsize.
Optionality on the upside and downside. Best case scenario.
Figure Out The True Costs of the Deal
Before you sign a term sheet, you need to really understand how much it’s going to cost you to get into a space. There are hidden costs everywhere, from inaedequate HVAC (that can be on you to fix), to insufficient electricity, and network cabling that has to be rerun throughout the space.
Hire an engineer to walk the space and give you an assessment of the mechnical systems. This is incredibly important. It should cost $1 – 2k for a walkthrough and report. If issues are discovered, you’ll want to work out with the landlord how they are going to be resolved as a part of the term sheet.
Get your archictect to create a simple space plan, and then put a cost estimate to it. I’ve had spaces I thought were perfect ultimately fall through once I saw a space plan and realized it wouldn’t really work out for the team the way I had hoped.
A little bit of pre-work goes a long way. Once you’ve signed a lease, you can’t address obvious shortcomings you could have figured out earlier.
Get These Key Office Space Lease Terms Right
Get The Shortest Possible Term, Think About Termination Right
This sounds obvious, but there are variables the landlord is thinking about that can give you leverage on term. If the landlord is offering you a Tenants Improvement Allowance (“TI”) to help you fund work on your space, you can often trade lower up front cash for a shorter term. If the building has to invest more of their own cash into the deal, they are going to want a longer term to amortize those costs.
I’ve never been stuck in a 7 or 10 year deal in New York City, even though that’s the standard term in that city, and I’ve done plenty of direct leases over the years. Get creative to avoid those kinds of terms.
ROFR and Options to Renew
Expansion options are important, as are rights to renew your lease. They aren’t always easy to get, particularly if your building has a bigger tenant that already has similar rights that would supersede yours. This can include the right of a larger tenant to take your space or force your to relocate within the building, so be sure you find out if anyone else in the building has those types of rights.
You want to push for ROFR and Renewal rights, to maximize flexibility as your company grows. Expanding into another space in the building, or simply being able to stay where you are at the end of your lease is much easier than having to go out and find a new space to accomodate your growth.
Get The Right to Sublease. This is Non-Negotiable!
Your office space lease has to have the right to sublease your space to another company. This will be subject to reasonable landlord review and approval, but you can’t do a deal without this right. If you have to upsize or downsize, this will help ensure you can offset all, or at least most, of your current lease when you move out of the space. Any reasonable landlord will give this, and you shouldn’t do a deal without it.
Try To Negotiate A Right To Terminate The Lease In Longer Deals
Even five year leases can seem like they run forever when you have so much uncertainty in your business. You can always try to negotiate a termination right. Many landlords will give this. I’ve had three year termination rights on a five year deal, and it made me much more comfortable with that five year term. There will be a penalty for terminating early, and it can be substantial. But the penalty will be less than the remaining full term of the deal, and worth paying if you have to get out early.
A Word About Co-Working Spaces
Finally, the rise of WeWork and similar co-working spaces has provided a new path for companies looking for office space. This topic requires a post of it’s own, as it’s not as straightfoward as it may seem. If you’re just a few people just getting started, using co-working space makes a lot of sense. But as you hit 20 – 25 employees, with an accelerating growth trajectory, you need to compare the economics of the co-working space with doing a more traditional office deal.
I strongly suggest you have the broker/architect team mentioned above to help you compare alternatives. Co-working space deals can be quiet complicated, and their pricing isn’t always very transparent, making it hard to compare to more traditional deals without a bit of help.