Class A, B or C? Buy or Lease? Here’s What You Need to Know
For some, the office is where the majority of time is spent in a day, other than perhaps at home. As much time and care goes in to finding the right home, the same can be said for the office.
Whether an existing company is reloWhether an existing company is relocating or a home-based business is venturing out for the first time, a variety of factors require consideration before a business owner becomes an office tenant.
First is the budget, namely what the company can afford per month, usually determined in collaboration with the company’s accountant and/or attorney. According to Chris Smith, SIOR, president of TriAlliance Commercial Real Estate Services, LLC, most business owners own their homes so they begin renting office space, usually for a three- to five-year period.
When contemplating a move to office space, consider the type of office desired. A variety of options exist in the Baltimore County and Harford County markets. Often desirable is space in a multi-story, Class A office building. This provides a visually appealing entranceway, frequently with an appointed lobby, elevator and common restrooms.
The single-story office option, whether in an industrial park-type space or a converted home, is rated as Class B or Class C, based on the quality of the building and size by CoStar, a comprehensive commercial real estate database of properties in the United States, Canada and Europe. The single-story offices usually provide direct entry from the street to the office space. There’s no appointed lobby or entranceway and no elevator to find. Single-story offices tend to provide a larger footprint, or larger space, for a less expensive rate per square foot. Parking is generally easier to find closer to the business’s entrance. There are minimal expenses associated with common areas, which keeps the rental rate lower as well.
“It’s really a matter of taste and budget,” says Smith, whose firm focuses primarily on Class A office space, with extensive experience in the health care industry. “The business owner needs to consider what is efficient depending on the use and hours of operation. It could be easier to have a direct entry suite.”
Space is rented through what are called full-service or triple-net leases. Taxes, insurance, utilities, janitorial services and even parking costs may be included in the full-service lease, according to Karen Deeley, senior vice president, MacKenzie Commercial Real Estate Services, LLC. The triple-net lease means the tenant pays rent plus all expenses on top of the base rent vs. a full-service lease where these expenses are included in the base rent. In the triple-net lease, the tenant is responsible for any necessary repairs like, to HVAC systems, for example. The triple-net lease is more common for retail and industrial space, Deeley says.
Specific budgetary items to consider paying on a monthly basis are utilities, phone and Internet. A company must also consider the purchase of office equipment like computers and printers, phones, copiers and fax machines – if not previously owned – as well as office furniture.
Other than financial considerations, location is a major factor. Generally, both the Baltimore County and Harford County office markets remain strong, according to Smith. Rental rates are stable and the market is considered “neutral,” with both tenant and landlord able to coordinate “reasonable” deals. Companies may consider “hot” areas in Baltimore County like Hunt Valley, Timonium or Towson, says Whit Levering, leasing manager for Merritt Properties. High end, Class A projects are more economical in suburban areas rather than higher-rent city or town centers, Levering adds. Towson has made headlines for its redevelopment renaissance with a variety of mixed-use buildings planned including office, retail and residential. Office locations there, however, will not include free parking, but workers will benefit with the amenities of being in a town center. The I-83 corridor from Timonium to Hunt Valley, in particular, has been the most active in Baltimore County over the last two years. In Harford County, the market in Bel Air is strong, while there are many empty buildings in Aberdeen that were built on spec for the base realignment growth that didn’t meet projections, according to F. Joseph Bradley, III, SIOR, vice president, MacKenzie Commercial Real Estate Services, LLC.
Size is also a factor in considering office space. According to Bradley, companies should compute the total square footage needed based on the number of employees who work for the company and the type of operation. Generally, Bradley says, companies consider about 150 to 200 square feet per person. A call center operation, for instance, with large numbers of cubicles arranged together, would require less space, where a law firm with large individual offices could require up to 250 square feet per person, he explains.
Another option for young businesses is to rent in a furnished executive suite. This is especially helpful for the home-based business venturing out for the first time. The executive suite setup provides office space and pay-for-use amenities, like conference rooms and office equipment, and provides shared lobby areas and kitchenettes. Some even provide a full-time receptionist to answer phone lines of all participating companies. Some also provide hourly secretarial services. The business owner rents a private office and pays a premium for the included services; utilities for the office are usually billed separately. Leases are generally offered annually, says Smith, for as much as 50 percent more than a traditional office rental.
“The move out of the house into a space can be an intimidating one,” says Levering. “These facilities provide an environment where it doesn’t need to be.”
The executive suite is also beneficial to business owners scaling back, he adds. Those who have sold their companies and remain involved on a consultant basis but choose to work away from the business may opt for this type of space.
Several national companies and privately owned groups offer this type of arrangement throughout the Baltimore area and into Harford County. Some provide unstaffed office suites, thus requiring the businessperson to answer phones and perform their own secretarial duties. Once the business grows and needs more than a few offices, most business owners realize they can lease their own space and save money.
“It really saves a growing company startup costs,” says Smith.
Instead of leasing, established businesses may opt to purchase a building if they remain at the same location for more than 10 years. Purchasing a building provides the company with tax advantages much like those afforded to homeowners. Not many business owners consider this, Smith says. Owning the property also eliminates the need to renegotiate with the landlord each time a lease expires.
“The rule of thumb is after you’ve rented for 10 years, you would have bought the property,” says Smith.
Generally, landlords make concessions for tenants, especially when committing to space in a large multi-story building. This includes building out new construction to accommodate the company’s requirements like a conference room, restroom, kitchen and more. If the space was previously occupied, more negotiation is usually involved for improvements to the space. Tenants may be required to pay a little bit more each month to counter construction costs.
“If the build out is not very extensive, then it’s not unreasonable to ask for flexibility on the rent,” Smith says. “It’s a reasonable approach to begin the relationship. Having a compromising attitude works well for both parties.”
Deeley stresses that business owners should thoroughly research and contemplate their needs prior to contacting a broker to visit several office spaces.
“It’s important to make sure they understand what they need – often what they thought they need, maybe they don’t,” she says. “Maybe they don’t need a huge conference room and can utilize a shared conference room on the first floor. If they use a conference room just four times a year, then they shouldn’t pay rent for one. They can easily rent a (conference) room from a hotel down the street four times a year.”
Other amenities like in-office restrooms and showers and large eat-in kitchens can be expensive and unnecessary, Bradley adds.
“We can help them think about what they are asking for and if they really need it,” he says. I95