As you browse locations, one thing may be at the forefront of your mind: rent. How much rent can your business afford? Should you pay more for a nicer location? Could you get away with a location with a lower rent cost?
Most people want to pay as little as they can for rent without scaring away their customers. You want an affordable space that’s accessible and welcoming. Your budget and operating costs, along with the location’s traffic, will affect how much you should spend on rent.
Read more about commercial rent and how to find what rent you can afford.
Usable vs. Rentable Square Feet: What’s the Difference?
First, let’s talk about how most landlords calculate rent. You may have heard the terms usable and rentable square feet. Your commercial rent will be determined by rentable square feet. What’s the difference?
- Usable square feet: The space your business will actually occupy is the usable square footage. This includes areas like private bathrooms and storage closets.
- Rentable square feet: Your rentable square feet include the usable square feet and a percentage share for any common areas. You’ll pay for common areas with a share proportionate to the amount of space you lease. Examples of common areas are bathrooms, elevators, stairways, corridors, and shared meeting spaces within a building.
Find Commercial Rent Per Square Foot
If common areas are involved, landlords will use a load factor when calculating rentable square footage. To find the load factor, they’ll take the building’s rentable square feet divided by its usable square feet.
Building’s rentable square feet / Building’s usable square feet = Load factor
Each tenant’s usable square footage is multiplied by this load factor to find the rentable square footage of the space they use.
Tenant’s usable square feet x Load factor = Tenant’s rentable square feet
Once the tenant’s rentable square footage is found, it’s multiplied by the rental rate to generate a monthly or annual rent amount.
Rentable square feet x Rental rate = Monthly rent
How to Calculate Sales Per Square Foot
Commercial tenants should be able to spend 5% to 10% of their gross sales per foot on rent. Your gross sales divided by the location’s square footage will give you sales per square foot.
Gross sales / Square footage = Sales per square foot
For example, you estimate your business will make $300,000 per year in total sales, and you are looking at a 1,500 square foot space. Based on this, you’d make $200 per square foot in sales.
Comparing Rent Costs
When comparing properties, you’ll want to calculate the percentage of your income that would go toward rent to find the best deal. If the space mentioned above is at a rental rate of $20 per square foot, you’d divide that by your $200 in sales per square foot. With this formula, you can see that you would pay 10% of your business’s income toward rent.
Rent per square foot / Sales per square foot = Rental budget
By finding this percentage, you’ll be able to see if the rent amount will fit within your budget and compare it to your industry’s benchmark. If the rental budget is much more than your industry’s benchmark, you may want to look at other commercial real estate options.
Traffic & Advertising Costs
We’ve shared how to find different rent amounts, which you can use to determine what you can afford based on your expenses and estimated sales. What else could affect your rent costs? Traffic. How can you increase traffic? Advertising.
Traffic and advertising go hand in hand. When you advertise, you bring customers to your door; however, advertising costs can take up a big portion of your budget. How much you need to spend on advertising will help you determine how much you can afford for rent.
A building’s location affects the amount of traffic it receives and the amount of advertising you’ll need to do.
- High traffic area: If the location is near a high traffic area, it may offset your advertising costs. Anchor tenants, such as department or chain stores, can increase traffic to your business. More traffic allows you to spend less on advertising so you can pay for a higher rent.
- Low traffic area: On the flip side, you may be inclined to spend much less on rent if the location doesn’t generate a high amount of traffic on its own. Lower rent will help you save your money for advertising, which will bring customers to your business and help you make a profit.
Rent is only one part of your occupancy cost. As you look at locations, you’ll want to keep other expenses in mind. In addition to base rent, your business will have to pay for things like common area maintenance fees, property insurance, property taxes, and utilities.
What you can spend on rent will depend on your business’s annual expenses and profit. Do you want to find a space for your business that you can afford?
At Commercial One Brokers, we can help you make an informed decision for your next location. Contact or call us at 417-334-3149 about commercial real estate in Branson, MO.
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