Understanding Office Rental Rates is Crucial for Business Owners

Tenants need to know how office rental rates are quoted to understand total cost of occupancy. Here are 3 of the most common ways rates are listed.

 

Office rental rates in commercial real estateFor prospective tenants searching for office space nothing is more critical than the building rental rates and associated costs. I frequently speak to business owners searching on their own for office space and hear their confusion around the quoted rental rates for different commercial buildings. It’s important to understand the different rate structures in order to value an office building and compare all available options.

Below is a summary of the typical rental rate structures found in a commercial real estate office leasing transaction.

Full Service/Gross OFFICE Rental Rates – “FS”

Probably the most common way to quote rental rates for an office building is Full Service or Gross. This is often abbreviated ‘FS’ on market reports and online listings. Full service rental rates are the simplest way to quote costs. This rental rate can be considered an “all-in” cost for occupying an office space. A full service/gross rate will include the base rent as well as operating expenses. This number is usually provided on an annual basis. So, a building with a vacant 3,200 square foot office space, quoting $17.50/FS, means the landlord is asking for $56,000/year in rent ($4,667 per month).

The trend in commercial real estate recently has been for higher-end Class A office buildings to quote a Triple Net rental rate structure. It is still common to see Class B & Class C properties quoting Full Service/Gross rates.

 

Triple Net OFFICE RENTAL RATES – “NNN”

The second most common form of quoted rental rates is Triple Net – abbreviated ‘NNN’. This form is increasingly popular among Class A office buildings. For a refresher on how office building classes are assigned check out my article How Nice is My Office Building?

A Triple Net rental rate can be more challenging to understand and calculate. With this form of rental rate the building is essentially listing a base rental rate excluding operating expenses. These same services are still provided by the building property management, but the costs are separate from the base rent. The three “N’s” signify the costs for the building property taxes, insurance, and CAM (Common Area Maintenance). The office tenants paying a Triple Net rental rate are paying this base rental rate plus all of the building’s cost for property taxes, insurance, and CAM each year.

Prior to signing a lease agreement the building owner or leasing broker should provide the tenant with an estimate of the current year’s operating expenses. It is important to understand the actual expenses can vary from this estimate. The office tenant will pay monthly for their portion of the estimated operating expenses on top of their base rent. The lease agreement will include a provision dictating how variances in the actual expenses will be addressed. Typically any overages paid by the tenant throughout the previous year will be applied as a credit toward future payments owed to the landlord. Of course if there is a shortage between the estimated payments made and the actual expenses, the landlord will invoice the tenant and expect payment within 30-60 days.

If a building is quoting a $17/NNN rental rate, the tenant or their commercial real estate broker will need to verify the current estimated operating expenses for the building for that year. Let’s say a tenant is considering that same 3,200sf vacant space, quoted at $17.00/NNN, and the estimated operating expenses are $12.23/sf. The annual rent for this space would be $93,536 ($7,795 per month).

 

Modified Gross OFFICE RENTAL RATES – “MG”

A less common way of quoting commercial office space rental rates is Modified Gross “MG”. This is sometimes referred to as “Plus E”. Generally speaking this is a full service/gross rental rate with something missing. Typically the missing cost component is utility/electrical costs for the space. It is important to clarify which costs are included when a modified gross rate is used. This is more commonly seen in flex and light industrial spaces, but some office buildings will use a modified gross or plus E rate structure.

 

A NOTE ABOUT OPERATING EXPENSES

Operating expenses are a key component to evaluate for any commercial office building. When a full service rate is quoted for the building the operating expenses are bundled into that number. These operating expenses generally include Taxes, Insurance, Maintenance, Management, Electrical/Utilities, and Janitorial costs for the building. Together these costs make up the Common Area Maintenance expense mentioned above. It’s important to remember that insurance, used in this context, does not include the costs for general commercial liability coverage, business interruption, automobile, or other insurance policies that may be required by the landlord. These policies are considered an additional expense for the office tenant.

 

Summary

In conclusion, there are many different ways to quote and calculate rental rate costs for commercial office buildings. We’ve covered the three most common ways a tenant is likely to see the rates quoted in this article. If the tenant has any doubt how rental calculations are made or what is included it is best to ask the leasing broker or have the tenant’s broker find out.

For any specific questions or concerns regarding office space rental rates, please contact me today.