How Much Commercial Rent Should You Pay?

When the end of the year reaches your calendar, (maybe the quarter) it means one thing for business owners and managers – it’s budget time. You spend days and even weeks going through the previous year’s budget, forecasting, and planning for the year and quarters ahead, and you compile your budgetary road map.

Business budgeting is one of the most powerful financial tools. Often, you look at line items as a percentage of your budget or as a percentage of forecasted income. Though rent may not have been on the front of your mind, it is now as you compile your budgets. Payroll, rent, inventory, advertising, and insurance are big items. Payroll is usually at the top and rent is usually the second or third highest expense.

Rapidly growing companies may be running out of space. Alternatively, you might have a lease expiration coming up in the middle of the fiscal year. Many people read stories of rental rates going up in DFW and other parts of the U.S.

Here’s some questions you might be thinking about:

  • Do I pay the rates that are out there?
  • Do I upgrade my image and go to a nicer, potentially more expensive space?
  • Do I lease more or less space?
  • Do I get more space in a less expensive building?

Those are questions only you as a business owner can answer. Deciding what is right or wrong for your business is up to you, but we can help you along the way and offer you plenty of tools and guidelines for making those decisions.

Business can sometimes be a little bit like outrunning a grizzly bear. You don’t necessarily have to be the fastest runner – you just need to run faster than your competition. A good way to run faster is to cut expenses relative to your competitors.

So what is a good benchmark?

There are a few different research firms that provide metrics for rent as a percentage of revenue.  BizStats offers some free stats on small businesses. The average rent to revenue percentage for small business comes out to about 2.78 percent.

Technical services, like law, architecture, engineering, IT, and marketing and advertising firms, tend to average around the three to five percent range, slightly higher at the cross section as a whole. The Dallas Regional Chamber reported that 97 percent of businesses in the DFW Metroplex have fewer than 100 employees, and the Small Business Administration (SBA) reported that employers with less than 500 employees represent 99.7% of the employers nationally.

The SBA’s general guideline is 500 employees for most manufacturing and mining industries or $7.5 million in average annual receipts for non-manufacturing businesses. These metrics are further defined on their site here.  At $7.5 million in sales, and an average of 2.78 percent, the average rent of 99 percent of employers nationally should be around $208,500 per year.

To put this in perspective, if you are the business owner of a five-broker insurance agency with a support staff of two, and you make $2 million in annual revenue, using an average of 3.46 percent rent-to-revenue metric – you are looking at $69,200 per year in rent.

Most insurance firms like this will use about 333 rentable square feet (RSF) per person such as: five offices, some open area, a conference room, break room, and reception) for a total of 2,331 RSF. This means that to be competitive you need less than $29.69/RSF full service gross or about $27.69/RSF net of electric.

The correct ratio varies depending on the type of business and the type of location. From start to finish, Whitebox Real Estate can help keep your budget on track so your business can stay ahead of the competition. We always strive to bring meaningful value to our clients that positively impacts their bottom line.  Let us help you outperform your competition!

 

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