Head to the bottom of this piece for a glossary of office space terms.
A common question in commercial real estate is, how does coworking compare to office space? In some ways, they aren’t that different. But in many ways, they are nothing alike. This can make it difficult to compare an office lease to a coworking plan.
Elements of a commercial office lease
Comparing the price of coworking spaces to traditional office space can appear complicated. Frankly, just understanding a conventional office lease can be challenging enough. The following is a guide to understanding how a coworking membership might compare to a traditional office lease for small businesses or startups.
When it comes to a traditional office lease, there are several different types. Typically, people don’t know how much office space costs. Most commercial office spaces have a lease rate discussed as price per foot per year. Beyond this, there can be a few different ways to figure the extra tenant expenses. The most important thing to realize about leasing an office space is that there will be costs above the base rent. One of the most typical leases is a triple net lease, shown often as NNN. Another common type is a gross lease. You might also find an absolute net lease, full-service lease, or modified gross. All of these options act differently and present expenses differently to renters. Ultimately, all of this means it is essential to understand your all-in cost to lease traditional office space.
Traditional office space will present costs on a per square foot basis. The price you pay for rent will vary vastly depending on the quality of space you are renting. On the basic level, you’ll see office space referenced as class A, B, and C. Even within these classes, the quality of space can vary widely. In the Omaha office market, office rental rates may vary from as low as $10 per square foot to prices over $30 per square foot. In larger markets, rates are much higher.
Your cost of traditional office space will be higher than your per square foot rate. Depending on the type of lease, you’ll also be responsible for taxes, insurance, common area maintenance, utilities, and other building-related expenses.
The first question to ask is, what is base rent? Base rent is a per square foot rate annually. For example, a rent of $12 per square foot is $1 per square foot per month. If you’re renting a 1,000 square foot office space at $12 per square foot, you’ll be paying $12,000 annually, or $1,000 per month. Often, this rental rate is called base rent. But, there is almost always more to pay above your base rent. We won’t explore every type of lease, but we’ll show you the most common types of office leases.
Triple Net Lease
A triple net lease usually appears as NNN. It stands for the net, net, net. The “nets” in a triple net lease are real estate taxes, building insurance, and maintenance. This is often expressed as a per square foot fee annually, just like base rent. For example, if a 1,000 square foot space has triple nets of $8 per square foot, then you would pay $8,0000 annually. Often, a tenant will not have the whole building. So you will typically see language in a lease around your “pro-rata share” of expenses. This means your share of the costs based on the percentage of the building you’re leasing.
There are key things triple nets do not include like utilities, preventative maintenance, liability insurance, and repairs to something within your space.
A gross lease includes many of the additional expenses we previously discussed. A gross lease will often include the base rent, as well as things like taxes, maintenance, and building insurance. Sometimes a gross lease will even include utilities. This type of rental can make costs much more predictable for tenants. For example, a gross rent of $20 per square foot on a 1,000 square foot space would cost $20,000 annually. That would be $1,666 per month.
Still, even with a gross lease, there can be additional expenses. Sometimes they do not include utilities. They may not include other types of maintenance like pest control, window washing, or repairs to toilets and clogged sinks.
All-In Cost for Office
No matter the type of commercial lease you end up with, you’ll want to understand your “all-in cost” for the office space. This involves your base rent, NNN expenses, maintenance costs, repair costs, utilities, and any other monthly expenses for the use of the space. While a base rent might be $12 per square foot, it could be that all costs are $23 per square foot. On a 1,000 square foot space, this means rent might be $12,000 per year, but the all-in costs are $23,000 per year. There are online calculators that can help with these calculations.
Capital expenses for office space
Beyond your expenses for renting office space, you’ll need to consider your capital expenditures for the new space. For example, will you need new furniture for the workspace? Office furniture for open office spaces can easily cost $1,500 per person. How about art? You may also need audio and video equipment. Many people don’t consider the cost of business internet when setting up an office, which is much more expensive than home internet packages. All of these expenses can add up to thousands and thousands of upfront capital costs and ongoing expenses.
Is office space a liability?
Finally, small business owners need to realize that office space is a liability on their balance sheet. A five-year lease on terms like we outlined above could count as a liability of over $100,000. This lease debt can affect a business’s ability to get loans for operating the company. A personal guarantee is often required as well, meaning business owners must commit to paying the lease themselves should their business not work out. These can be significant liabilities, even with a smaller commercial office space.
The total cost of office space
All of this information should be defined to understand the total cost of office space. The base rent of a workspace is typically the most readily available number, but office space costs more than the base rent. It’s essential to add up all the monthly expenses, figure all the capital costs, and consider how the lease liability will affect your company.
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How coworking memberships work
Coworking is any flexible office space with shared amenities. When it comes to coworking space, you will most often encounter a fixed cost with little or no fees charged in addition. Coworking spaces typically charge a membership fee, not a lease rate. This means there is no liability on your balance sheet and often no personal guarantee. A coworking membership will typically include all triple-net type expenses and maintenance fees. Your one membership expense will cover the pest control, repairs, management, taxes, insurance, and other items that you’ll be responsible for on a commercial lease.
What does a coworking space include?
Different coworking spaces provide various types of office amenities. When comparing them, it’s a good idea to learn about which are provided and which are not. It’s important when comparing offices of any kind to understand all of the added benefits and how these might help you. Some coworking amenities may save you money, like the fast internet or included furniture. Other office perks might assist you in recruiting talent like location, culture, or fitness center access.
Identify limitations on the amenities and access
While coworking spaces provide several amenities, that doesn’t mean they are unlimited. Some are only available for an extra expense. One space may offer memberships with a few hours of conference room space, while another may provide unlimited conference room reservations. Some coworking spaces charge for parking, while others have free parking available. Identify which amenities are an extra expense, which have limitations, and which are unlimited. These can make a massive difference in the overall cost.
Additionally, be sure to ask about access to the space. Many coworking offices are 24/7, but some are not. Some only provide access during business hours. These questions should also include guest policies. Most coworking spaces will allow guests, but not all. Some allow guests at any time, while some may only allow guests during business hours.
Shorter membership terms and flexible space
The flexibility of coworking means your membership term will likely be far less than a commercial lease. For many young companies or growing startups, this can be very helpful. Membership terms are often as short as month-to-month and as long as 12-months. Coworking spaces allow you to treat office space like just in time inventory. You can access the space you need when you need it and nothing more.
For example, you may plan to grow by five employees over the next twelve months. Perhaps you hope to grow by fifteen employees over the next three years. With a commercial lease, you’d need to plan for this and rent far more space than you need now to accommodate this future growth. In a coworking space, you can add desks or offices as you grow. Pay only for what your team needs now, and add spaces as you add team members. This can save thousands of dollars in wasted space early on.
A summary of how to compare office and coworking
Finding the right space for your team is an important decision. There is, of course, no one right solution for everyone. Commercial spaces are the right option for a lot of companies. Coworking spaces provide exceptional value for many as well. Ultimately, you need to understand two things: what is the net cost of each option and what is the unique value.
Be sure you’ve identified the costs of each and understand how much your monthly expense will be. Consider the critical factors like the length of the lease, location, parking, access, and how much liability you’ll have. Finally, consider the unique values each can provide, such as a space that will help you recruit talent.
Let’s look at an example from Populus Coworking versus a traditional Omaha office space for a startup company with six people.
Rent: $16 PSF
NNN: $6 PSF
Utilities: $2 PSF
Cleaning: $2 PSF
Total for a 1,500 SF office: $3,125
Gym Memberships: $240/mo
Coffee and snacks: $75/mo
Furniture lease: $350/mo
— Total: $4,190 per month
— All Included: $2,600 per month
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Glossary of Office Space Terms
Agent: Real estate agents are trained to handle commercial real estate transactions. They must do so, though, with the guidance of a broker.
Base Rent: This is what you pay for the use of commercial office space.
Broker: A real estate broker is licensed and trained to handle commercial real estate transactions. They assist owners, renters, sellers, and buyers.
Build to Suit: An arrangement in which the building owner will take the responsibility of building the space the tenant requires.
Class-A Office: Typically the nicest, and often most expensive, office space. Generally, this space will be newer, though not always. You will often find clients like law firms, banks, or consulting firms in these types of spaces.
Class-B Office: This is the majority of the space on the market. We might call this “middle market” type of office space. It can range from relatively nice to lower-end spaces.
Class-C Office: This would be the low end of the market. This space is often either not very nice, or in a very challenging location. Approach this type of cautiously, though it does have its uses and benefits.
Common Area: Any piece of an office building that would be shared amongst all tenants or uses. This might include things like entryways, lobbies, or hallways.
Gross: In a lease, this typically means your covering all or most expenses in the gross payment. For example, if your rent amount is referenced ‘gross’ this means it includes things such as takes, insurance, and maintenance.
Square Foot: Typical commercial space is measured and referenced by its area in square feet. That is, one square foot would be a square of one foot on each side.
Tenant Improvement Allowance (TI): This is an amount of money that a building owner will provide to the tenant. It is used to rework the office space to fit the tenant needs. This can be paid back in a number of ways. This is typically provided as a number of dollars per square foot.
Triple Nets (NNN): These stand for the net, net, net. In this type of lease, the renter is responsible for taxes, insurance, and maintenance (the three nets) on top of their base rent.
Utilities: These expenses will include things water, electricity, gas, and trash. These are often individually metered per tenant or suite within an office space. If they are not, they will be averaged out for the building based on your square footage use. If you use 10% of the building you pay 10% of utilities. Meters per space is much more ideal when controlling costs.
White Box: when space is stripped down and provided as a “blank slate” it is often called a white box. The term comes from the fact that the space will often be painted a base white and is essentially an empty box.
Disclaimer: This article is intended to help business owners make more informed decisions in regards to the topic; however, please contact an attorney for legal advice and an accountant for tax advice. Populus makes no representation as a legal advisor or tax advisor.
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