How to Budget for Your NYC Office Space

With talented workforce here to stay, we’ll let you in on a little secret: the NYC office leasing market is already back, and companies are coming in hot. The city may not be booming the way it was pre-pandemic (yet), and there is still a 22% vacancy rate with close to 120 million available square feet on the market, but we’re seeing companies slowly but surely securing space to get back to the office. 

With COVID-19 calling into question whether office space is a necessary expense, we’re now seeing an increased focus on what exactly it will cost to come back. Whether you’re reinventing your company’s footprint by taking a brand new, built-for-you direct space or snatching up one of the beautiful plug and play subleases left on the market, it’s important to distinguish space “wants” and “must haves” and how to budget for fully loaded space (hint: it’s not just rent). Being as discerning as possible with yourself (and us) will help distinguish between spaces that work within your budget and spaces that fulfill every wish but aren’t worth the cost compromise. Most landlords in this market will “build to suit” within reason, meaning they will do a standard build for you with a mix of conference rooms and offices.

Here are a few common questions we’re having with clients and other decision makers looking to bring employees back to the office and answering for you here:

1) What costs am I incurring when I take a short term (sublease) office space? 

Base Rent: This will differ based on neighborhood, building class and ownership, type of space, how long it’s been on the sublease market, and state of the market (i.e. steep discounts from COVID-19). Base rents can range from $30/sf for cheap to $80/sf on the more expensive side. 

a) What are the additional costs outside of base rent? 

• Operating expenses paid as annual rent escalations – no matter what space you take, you’re going to pay annual rent escalations that start 12 months after the start of the lease. Annual rent escalations are typically used to cover the operating expenses of the building so there is no additional cost to the tenant for operating costs like gas, water, and sprinkler. Depending on the size and term of your deal, you will pay:
  • direct operating expenses: your landlord will pass operating expenses directly through to you; this is typically given to tenants taking a large footprint or tenants taking a long term.
    • How to budget for this: we typically model this as a 1% annual increase in base rent. 
  • indirect operating expenses: in most cases, landlords will charge each tenant a market standard range of annual increases in base rent and keep the spread between what they pay for operating costs and what you as the tenant pay. This should be specified as a hard number in your lease.
    • How to budget for this: this is typically a 2% – 3% annual increase in base rent; we’ll model depending on which number is specified in an offer or term sheet.
  • Electric – this is your standard electric bill.
    • How to budget for this: we typically model this between $3 and $3.50 per square foot for “standard” usage. 
  • Commercial rent tax – If your annual rent is above $250k, you’ll pay a commercial rent tax to the city.
    • How to budget for this: this is calculated as 3.9% of total annual rent (not just the annual rent above a $250k floor – this is a common question we get). 
  • Operating expenses – The additional operating costs of a building, such as gas, water, and sprinkler, are typically baked into rent escalations, but this can vary depending on the building and owner. Some buildings will start with a lower base rent and use both annual escalations and additional operating expenses to land on par with the rest of the market; buildings that do this are typically not marketed as your typical full service “office” building, and your broker should know from experience whether you can expect to pay these charges in a specific building.
    • How to budget for this: buildings vary, but you can estimate that garbage removal will cost about $300 / month, and water and sprinkler will cost you around $200 / month. Again, this all varies depending on the size of the building, the amount of space you take, and the number of tenants in the building.
  • Cleaning – Class A buildings include cleaning in their base rent – most others don’t. You will likely have to use the building’s vendors, but will pay for the service on a monthly basis. 
    • How to budget for this: we model cleaning at an estimated $2/sf annual cost if it’s not included in your rent.
  • Security deposit – almost every tenant will pay a security deposit when they take a space. It will typically be in the form of a letter of credit for your bank, and depending on your size and stature you will or will not have to cash securitize that letter of credit. This is an important number to model from a budgeting perspective because it is a cost tenants are expected to pay upfront in year 1.
    • How to budget for this: for most tenants, we will model security at 5 months of rent; for companies with strong financials and established history, most landlords will ask for between 4 and 6 months. This varies depending on the history of your company, so startups are typically asked to post closer to 12-18 months worth of security, whereas a billion dollar publicly traded company may not need to post security at all.

b) What costs am I not incurring when I take short term (sublease) office space?

• Furnishing and wiring – When you commit to a short term sublease you get the whole package. The space comes “as is” meaning when you come in on your first day you can sit down and get right to work without all the hassle of setting up the space. 
• Real estate taxes - in a short term space you typically won’t pay real estate taxes if you sign for 1-3 years. This is something we negotiate, so it’s not always guaranteed. (see long term real estate taxes for breakdown)

2) What costs am I incurring when I take a long term (direct) office space?

Base Rent: This will differ based on neighborhood, building class and ownership, type of space, how long it’s been on the market, and state of the market (i.e. steep discounts from COVID-19). Base rents can range from the low $50s/sf for cheap to $150+/sf for new construction buildings. 

b) What are the additional costs outside of base rent? 

Additional costs for a long term (direct) space are typically the same as a short term (sublease) space, but there are a few that you will have to cover if you do decide to go long term: 

• Real estate taxes – as a tenant, you’ll pay your proportionate share of the increase on your building’s real estate taxes above a base year. Your base year will typically be the year in which you’re signing the lease, and establishing this base year correctly can have a big dollar value impact.
  • Note: nobody can predict taxes to the dollar so taxes in our financial analysis are always an estimated cost, but we’re able to estimate pretty closely by calculating a 5 year historical average based on the building taxes. 
• Furniture and wiring – unlike short term space, most direct spaces will not provide furnishing and wiring. 
  • How to budget for this: For furniture you’re looking at $10/sf for cheap to $30/sf for high quality pieces and wiring will cost you $5-10/sf. 

All of the above costs, whether it be short term or long term, are economic terms of a lease and will be negotiated by your broker. The amount you pay will always depend on the space you’re taking, but the above expenses can be found in any lease. It’s important to remember all of these costs when creating a budget for a lease. It’s our job to help you navigate the budgeting process to see exactly where your money will be going within your space. One tactic we use to help our clients understand this process more fully is by creating a financial analysis that not only gives you a cost comparison between different spaces, but also compares the offer we give to the counteroffer ownership sends back. This helps us to know what points are negotiable in the lease, and where we’re likely to land a deal.

Takeaway:  the costs that you’re actually incurring when you take office space will include more than just base rent, but a good broker will be transparent and help you understand the full picture of what you’re paying for.