It’s amazing to me how many individuals and companies start their search for commercial real estate space (office, retail, warehouse) without knowing how much they can afford to spend on rent each month or year. Some will say they can’t establish a budget because they don’t yet know what things will cost, however at the end of the day it’s important that you have a maximum dollar in mind BEFORE starting the search.
Considering that your monthly commercial rental expense is, for many businesses, the 2nd largest expense a business may have next to salaries, it is important that the person responsible for choosing office space both understand and is comfortable with the company’s rent expense exposure. It is important to know your price range before looking at office space to eliminate wasting time and money reviewing spaces that you just can’t afford.
Unfortunately, there is no exact science or formula to get a defined answer to this. If I were to arbitrarily say that your rent budget should be 20% of your annual overall expense budget it would be a disservice to small and large companies alike. A large law firm, in many cases, may have the revenue stream to support a rent payment that is much higher than a non-profit organization. If we were to use this 20% rule here, it may be a deal for law firm office space but a burden for the non-profit company.
The key in most cases is to not get emotional about the commercial space. Remember, this is a business decision and one that could have a major impact on the success or failure of your company. Do the math! Make sure that you know what your business can afford today and not what may put you out of business tomorrow.