A New Occupancy Rate in Lease Negotiations

by CoyDavidson on June 20, 2012

In the past if you were to associate “occupancy rate” with an office lease negotiation what would have come to mind are the occupancy rate of the building or submarket and the relative negotiation leverage of either the tenant or building owner based on current market conditions. While this will always be a factor as supply and demand plays a dominant role in determining market rents, there is another occupancy rate creeping into lease negotiations.

There has been considerable commentary recently on the trend of shrinking office space allocations per employee among corporate office space users. In the past it was a pretty common rule of thumb to allocate 250 rentable square feet of space for every employee when planning your office design. According to recent data from CoreNet Global, the average today is 176 square feet per employee as compared to 225 square feet in 2010. This trend is expected to continue and be 151 square foot per employee in 2017.

The Parking Issue

An urban office building typically has a parking capability or ratio of 3.0-3.5 per 1,000 square feet of rentable space. Some suburban office buildings have higher ratios of 4.5 to 5 per 1,000 rentable square feet. Office buildings leases typically use a ratio of a certain number of parking spaces for each 1,000 square feet of rentable area leased when allocating parking rights to tenants. When negotiating your office lease beyond cost, making sure that you have adequate parking rights allocated is a matter of critical importance to the tenant.

I recently was involved in a lease negotiation for an office space in a building where the office space plan was designed for 24 employees in 4,000 square feet of office space, a 6:1,000 square foot ratio. Most tenants want to take the approach of negotiating at least the rights to the highest allocation possible, but what they are willing to pay in parking charges is a different matter. While the tenant was cognizant that negotiating a 6 per 1,000 parking ratio wasn’t feasible or even necessary in this particular case, the impact on this particular company’s occupancy on the building parking capabilities was an issue with the Landlord after they viewed the tenant’s space plan for the first time

It’s a New World We Work In

Building owners are now taking notice as most every company opts for denser workspace, which is increasingly taxing the parking capabilities and other building infrastructure of some properties. In this particular case, while every employee has a dedicated workspace, we had to justify the “occupancy rate” of the tenant’s workspace and get the building owner comfortable that many of this companies employees work offsite the vast majority of the time. I should note the building management just didn’t take the tenant’s word for it. They sent their leasing agent and property manager to the tenant’s office unannounced to see for themselves.

This is the first time in my 22 year career that I have seen the tenant’s “occupancy rate” become such a major topic of discussion in a lease negotiation, outside of a known dense space requirement, such as a call center or a company leasing a major portion of a building. While the idea of a Landlord considering the impact of a particular tenant’s occupancy on the overall operations of the building is nothing new, with work space allocations shrinking and more companies moving toward increasingly dense office space requirements, this discussion will likely occur more frequently in future lease negotiations, even for 4,000 square foot office tenants.

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  • I just go through the article. It’s really helpful and informative. i think people should go through it.Thank you for sharing.

  • Commercial Review Appraiser

    This is interesting from my perspective as a review appraiser. It presents another component of value when analyzing rent comps & comparable sales.

  • Darren Shaw

    Coy,

    Good post. We are wrestling with the same dilemma in our market.

    Darren

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  • Katheryn Conant

    Helpful comments – I loved the analysis ! Does anyone know where my company might obtain a template Sample Residential Lease Form document to work with ?

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