Understanding Office Rental Rates

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

 

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. 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 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.

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. It’s important to remember that insurance as mentioned above does not include the cost 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.

 

Triple Net – “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. 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.

 

Modified Gross – “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.

 

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.