The Hidden Costs of Managing an Office Space
Understand the Short- and Long-Term Expenses
Signing a lease on a new office is a major milestone. Perhaps you've found a space that you hope will be your company's home for many years. Or, you may be expanding into new cities and opening regional offices—either way, it's a cause for celebration.
As a senior director at WeWork—and having led startups in New York and Toronto as a founder, a CEO, and a COO for more than a decade—I've signed a fair share of leases.
My biggest piece of advice is as follows: Before you ink the deal, take time to evaluate not only the actual lease, but also the additional costs that come with managing an office; They may add up to much more than you expected.
If you're not sure where to start, here's a breakdown of what to consider.
Just like when you rent an apartment, signing a commercial lease requires an upfront payment. Similar to the standard first and last month's rent plus security deposit that you would put down for a residential property, a commercial lease requires one, too. While three months' rent is typical, landlords may request more for younger companies without established credit history.
After you've signed the lease on your office space, the next step is making it your own. That means customizing the space with a floor plan that suits different employees' working needs. For example, an engineering team's ideal configuration is different from that of a sales team. Plus, you'll want to add design touches that reflect your brand and company culture, like your signage in the reception area, or your brand colors in the common space. To achieve this, you'll need to source and manage architects, designers, contractors, engineers, and other vendors.
In New York, the average office buildout cost ranges from $161.05 to $247.67 per square foot, depending on the layout. In Phoenix, typical buildouts run between $143.56 and $166.18 per square foot. On top of the cost, a full buildout process can range from six to 12 months, depending on the size of the space and your level of customization—so factor in the additional expense of paying for wherever your employees will be located during that time.
Office Management and Maintenance
Once you've built out your space, you may feel like your work is done—but someone needs to maintain it. In order to keep your employees inspired and motivated, your space needs to be clean, safe, and fully functional.
According to PayScale, the average office manager salary in the U.S. is around $47,000. The average IT director salary is $115,00, The average mail clerk salary is $34,000 annually. A custodian costs about $27,000, annually. A security guard ? $31,000 a year.
That's a total of around $250,000 a year, without factoring in benefits, supplies, and infrastructure (such as Wi-Fi, software, phones, coffee, and cleaning materials) each of those employees needs to perform their jobs—which could push that total above $350,000 a year. Depending on your city, that figure could end up much higher.
Scaling Up or Down
Whether you're the CEO of a unicorn startup or a senior leader who's worked at a Fortune 500 company for the last 30 years, you understand that change is constant. Technology is evolving faster than ever, and businesses must constantly adapt in order to stay competitive.
Reorganizations will happen. Teams will grow, shrink, and merge. Companies will open offices in new markets and move out of others. Yet, commercial leases don't account for that. In the U.S., leases on commercial office space often can run 10 years or longer. If you need to scale up or down during that time, you'll end up burdened with liability, and paying a large penalty if you break your lease—or dealing with the headache of sub-leasing your space and managing tenants.
Even just one of those costs can have a massive impact on your company's finances, cash flow, balance sheet, and long-term planning, so take them into consideration before you sign that commercial lease.
About the Author: Michael Hershfield
Michael Hershfield is a senior director at WeWork where he leads the medium and large business segment globally. He's spent more than a decade in the startup space signing commercial leases in New York and Toronto while serving as COO of Nucleus Intercom, COO of Kitchensurfing, GM of Monetization at Sailthru, and CEO and co-founder of LiveStub.