Occupancy Costs -- More than Just Rent

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While rising rents in commercial real estate will impact occupancy costs, other components such as technical infrastructure and work environment changes can push these costs even higher, says Ryan Morris, President of Real Estate Partnerships & Alliances Inc. in the Houston Business Journal. In the past, Morris says, leases typically included rent, operating expenses and build-out, and occupancy costs did not change much during the lease period.

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But the rapid pace of change in today's business environment due to technological developments and changes in business focus can cause infrastructure to become obsolete while the lease is being negotiated, Morris says. The work environment must change with the technical infrastructure and changes in work flow, or productivity will suffer, he writes. To avoid spending investment capital that is needed elsewhere on these “low returning” assets, Morris recommends building flexibility into the lease and questioning concessions. Flexibility in office systems and equipment is critical for cost savings, he says.

Businesses have achieved some savings by reducing the ratio of employees per square foot of office space over the past ten or fifteen years, Ken Leiser, Vice President of global corporate services at CB Richard Ellis, says in the Boston Business Journal. He cautions that while these savings are “easily identified, budgeted and controlled”, managers should consider human resources costs, which are usually much higher than occupancy costs, in making space decisions.

As an example, Leiser says that nationwide studies have estimated that employees return to their desks 30 minutes sooner when they eat in the building where they work than when they go out. The half-hour work-time gained by a company whose employees earn more than $35,000 a year, leasing in a building with a cafeteria, becomes a substantial increase in productivity.

Office rents may rise in certain markets because of the sales price increases in recent commercial real estate deals, according to David Gurliacci, writing for the Westchester County Business Journal. Joseph Simone of Simone Development Company a participant in “RealShare Westchester”, a commercial real estate conference, said in the Journal report, “Rents have been lagging behind (office building sales increases) but they will catch up.”

Office rents in the U.S. are still much less expensive than in cities in Europe and Asia according to a survey of 50 cities worldwide by CB Richard Ellis. Office rents are the highest in West End of London. Midtown Manhattan, the most expensive commercial real estate market in the U.S., ranked 27th on the list. The only other U.S. cities in the top 50 were Washington, DC, Boston and Stamford, Conn.

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