The Money Tree-Can You Afford Your Space?

CB/Richard Ellis (CBRE) published a recent study confirming that the largest growth segment in the So Cal area is the tenant who employees 10 people and occupies approximately 3000 square feet (“SF”).

How does this study impact both the market and you as a tenant?

In 1993, Marcus and Millichap Corporate Real Estate and UCI Graduate School of Business Management published a study to better understand how companies managed their real estate. The findings confirmed:

1) There was a need for an outside professional to help manage firms’ real estate, and that

2) There was more to managing real estate than simply finding a broker to locate space every few years.

Even back in 1993 the largest segment of the real estate market was that same 3000 SF user. Today that size tenant is at peril to afford the recent escalation in rents. Real estate is considered a market driven segment of our economy. The market price is what people are “willing” to pay. While the smaller tenants far outnumber the “Elephants” occupying 10,000 SF, the Elephants still push up the market because they can afford it.

If a landlord wants to charge, as an example, $3.00 a SF per month for 10,000 square feet to an Elephant with gross revenues of $10M, then that firm would be spending about 3.9% of their revenue on occupancy costs; a very fiscally prudent number. Landlords though continue to push the envelope and try and get even higher rents.

One the other hand, if the smaller and average sized tenant leases 3,000 SF with gross revenues at a modest $1.25M/yr then they would be spending 8.64% of their revenues on occupancy costs. While still in the range where 10% would be excessive, it may be comfortably affordable.

Take that same scenario and downsize the premise to 2,000 SF with corporate revenues of $700,000. You are now looking at over 10.25% of your hard earned revenues going to the landlord. Can you really afford to do that or want to do that?

During the recent recession rents dropped significantly. In Orange County high rise buildings that rented for as high as $4/SF/Mo dropped to a more affordable +/-$2/SF; nearly half the peak rate. In June, 2015 it seems someone opened the barn door and rents started skyrocketing again. The lease you signed in 2010 at $1.90 and escalated to $2.40/SF is now $3/SF. PANIC!!!!