Price per Square Foot in Commercial Real Estate Leasing
When it comes to leasing commercial real estate, understanding the concept of “price per square foot” is essential. This metric plays a pivotal role in determining the cost of your lease and helps you make informed decisions as a tenant or landlord. In this blog post, we will demystify how price per square foot works in leasing in commercial real estate and explore its significance.
The Basics:
Price per square foot, often abbreviated as $/sq. ft., is a unit of measurement used to express the cost of leasing commercial real estate. This cost typically includes the base rent and, in some cases, additional expenses such as common area maintenance (CAM) fees, property taxes, and insurance. The calculation is straightforward: divide the total cost of the lease by the total square footage of the rented space.
The formula for price per square foot is:
Price Per Square Foot = Total Price or Cost / Total Square Footage
It’s crucial to note that price per square foot can vary depending on factors like location, property type, and lease terms. Let’s delve into these aspects.
Location Matters:
The geographical location of the property has a significant impact on the price per square foot. In prime urban areas, such as downtown business districts, prices are usually higher due to the high demand and limited availability of commercial spaces. In contrast, properties in suburban or less popular areas may offer more affordable rates.
Property Type and Class:
Commercial real estate comes in various forms, including office buildings, retail spaces, warehouses, and industrial facilities. Different property types have varying price ranges. Additionally, properties are often classified into different categories such as Class A, Class B, or Class C, with Class A representing the highest quality and amenities. These classifications can also affect the price per square foot.
Lease Terms and Additional Expenses:
The terms of your lease agreement play a crucial role in determining the final price per square foot. In a Triple Net (NNN) lease, the tenant is responsible for paying not only the base rent but also additional expenses like property taxes, insurance, and maintenance. These added costs can significantly impact the overall price per square foot. On the other hand, a Gross Lease typically includes most expenses in the base rent, providing more predictability for tenants.
Negotiating the Price per Square Foot
As a tenant, understanding how price per square foot works empowers you to negotiate favorable lease terms. You can:
1.) Compare properties: Research and compare multiple properties to find the best deal, factoring in location, property type, and class.
2.) Analyze additional expenses: Consider the impact of additional expenses on the price per square foot, and negotiate terms that suit your budget.
3.) Leverage market conditions: Be aware of the current market conditions and use them to your advantage. Landlords may be more willing to negotiate when the market is slow.
4.) Seek professional advice: It’s often wise to work with a commercial real estate broker who can provide insights into the local market and assist with negotiations.
Price per square foot is a fundamental concept in commercial real estate leasing. Understanding how it works and being aware of the various factors that influence it will enable you to make informed decisions whether you are a tenant or a landlord. By considering location, property type, lease terms, and negotiating skillfully, you can secure a lease that aligns with your business needs and budget. Always remember that a well-informed approach to price per square foot is the key to a successful and cost-effective commercial real estate lease.
