What is the Common Area Factor and How Does It Affect Your Rent Payment?
Understanding the difference between rentable and usable square footage is an important distinction in commercial real estate. The key to making sense of this difference is the Common Area Factor.
Here we’ll explore the reason this difference exists, and why it can often confuse commercial tenants.
Common Area Factor in Office Buildings
Multi-tenant office buildings, unlike many other types of commercial properties, include a number of common areas. These common areas can include the lobby, restrooms, tenant amenities like a cafe or fitness center, corridors, and mechanical rooms. All tenants leasing space in the building will share the cost for the common areas. This is known by many names including the add-on factor, core factor, or common area factor or mark-up.
Recently I worked with a client in the Energy Corridor here in Houston looking for new office space. During our initial round of property tours he expressed strong interest in a building which had recently converted from a single tenant corporate use to a multi-tenant structure. The renovation process was still underway at that time, and the floor plates and common areas were not fully determined and built-out. As a result the common area factor could not be confirmed at the time we toured the property.
What is a Typical Common Area Factor?
A typical add-on factor or common area factor will fall between 15-20%. This means that 15-20% of the total space within a given office building is taken up by common area use. The usable square footage of a company’s office space is the actual size of the space they occupy day to day. If you measured the dimensions of each part of the office space with a tape measure, this is the number you would get (more or less, we won’t get into the exact measurement standards in this post). So, how does the common area factor impact the usable square footage?
Calculating the Rentable Square Footage
The monthly rent expense for a typical office tenant is based on the rentable square footage. This can be calculated by taking usable square footage and multiplying by 1 + the common area factor.
For example, if the office space has 3,500 USF and the building has a common area factor of 17%, the rentable square footage would be 4,095sf. (3,500 x (1+.17))
When the Common Area Factor is Out of Control
After touring the property with my client we began negotiations with the leasing broker. Upon receiving an initial proposal we discovered an add-on factor in excess of 60%! Understandably this was not an acceptable situation for my client. Imagine leasing an office space consisting of 3,000 usable square feet, but paying rental expense on 4,800sf – out of the question. After much discussion and negotiation we were able to reduce the add-on factor to 37%, but ultimately this was not enough to make a deal.
It is not uncommon to find re-purposed office buildings with a high percentage of common areas. This is becoming more common in areas with struggling malls for instance, to re-purpose for large floor plate office use. Typically landlords will opt to use a “market factor” which is artificially lowered to compete with other properties in the area. In this situation the landlord was attempting to secure lease agreements with an add-on factor 3 times the market rate. I advised my client throughout this interaction and we decided to pursue alternative options in the area.
Office Versus Other Commercial Properties
Tenants leasing space in single tenant office buildings, retail centers, flex office spaces, and industrial buildings would be accustomed to usable square footage. Their head count per SF expectations would be aligned to these expectations as well. Tenants choosing to move from one of these types of properties into a multi-tenant office building will very likely experience “sticker shock” when they see how much the rent expense can increase.
Companies leasing space in a multi-tenant office building must always be aware of the add-on factor used in their building. It is important to ensure the rentable square footage for your lease agreement is calculated correctly. When considering a relocation make sure to check these numbers ahead of time to ensure a market factor is being used. This will help avoid paying for space you don’t use and likely will never see.