When you’re shopping for an office to act as the headquarters for your business, there are a plethora of costs that factor into the equation.
But what you may not be considering are the costs that come with getting it wrong—signing an inflexible, long-term lease that may not align with your needs during the term of that commitment.
And in a professional landscape and economic environment that’s fraught with change and volatility, it’s vital to take into account the cost of changing your mind.
Here’s what you need to consider.
4 Factors that may cause your office needs to change
The one constant for all businesses is that their needs change over time. The question is which changes are known and which are unknown. For many companies, their workspace is their largest single expense second only to the cost of staffing.
Here are four of the main changes that we see driving changes in workspace needs.
1. Restructuring, downsizing, or cost-saving
At some point in the coming years, your company might undergo restructuring, downsizing, or a change in direction, which could result in a reduced need for your office space.
This could be the result of technological advancements, like the rise of AI, or economic challenges that impact your business, in turn leading you to reconsider one of your most significant business expenses.
2. Expansion or relocation
On the other hand, your business may experience rapid growth or decide to move to a different location or market. After all, the goal for most businesses is growth.
So, you either need to plan ahead and pay for more office space than you currently need, or face the challenges of outgrowing your office footprint as your business expands.
3. Remote work and flexible work arrangements
In 2020, a significant portion of the workforce ended up working remotely. With this shift, many businesses are realizing that they don’t have the need for an office space to accommodate everyone on their team.
4. Misalignment of needs
There is always the possibility that you find you’re simply not satisfied with your office after a while—whether it’s the location, the amenities, the landlord, neighboring companies, or the space itself. The reality is that what works for you now may not work for you five years from now.
The costs of miscalculating your office needs
While the above is not an exhaustive list of reasons why your office needs may change, it does beg the question of what you might do if they did.
A traditional lease is a fixed commitment to a landlord that encumbers companies with fixed rental payments paired with unlimited exposure to increases in taxes and operating costs throughout the term of the lease.
For most companies with traditional leases, this commitment represents the largest liability on their balance sheet.
But what if you have to make a change before the end of your lease? What are the costs of getting it wrong?
Here are a few of the costs to consider.
Up-front sunk costs
Taking on a traditional office lease involves significant upfront costs that can end up being wasted should you need to make a change or terminate your agreement.
Depending on the condition of the office space and your specific needs, you may incur costs for fit-outs and renovations.
This includes customizing the space to meet your requirements, such as partition walls, painting, flooring, electrical work, or installing necessary amenities. The extent of these costs will depend on the condition of the space and the scope of renovations required.
Furniture, fixtures, and equipment
Many companies underestimate this cost when looking at suites that are already built out. The cost of furniture, equipment, enterprise technology, and simple customizations can add up quickly. Most of these items have little to no value at the end of the lease.
Leases are written by and for the landlord. They are lengthy, complicated documents that require the use of a real estate attorney to understand the obligations being entered into.
In our experience, legal fees to review and negotiate a lease cost in excess of $10,000.
There may be additional administrative costs, such as application fees, credit check fees, or lease document preparation fees. These costs can vary depending on the landlord or property management company.
Wasted C-Suite time
How many hours were invested by your executive team in finding your office space, negotiating documentation, and procuring furniture fixtures and equipment? What’s the dollar value of that time if it was spent on core competencies? There is a dollar value you should associate with diverting attention away from revenue, growth, and/or innovation.
If you choose to terminate your lease early, you can essentially consider these all to be sunk costs. You’ll never get this money—or that time—back and, if you go to sign another traditional office lease in the future, you’ll find yourself paying them all over again.
Cost expenditures over time
Beyond just the up-front costs of taking on traditional office space, there are also a number of factors that can cost you in a variety of ways in the event of a change in your needs or the economy.
Long-term commitments and inflexibility
How do you calculate the costs of being tethered to a traditional lease that no longer works for you?
While it depends on the nature of the change in your needs, it could include some of the following.
Paying for unutilized space
If your team gets smaller or becomes dispersed and your office space stays the same size, your cost-per-employee to operate your business grows accordingly.
Needing more space than you have
Conversely, if your business expands and you need to bring on more employees, where will you house them if you can’t grow the footprint of your office space? What will the alternatives cost you? Will you need to split up your team?
No matter your organization’s financial or staffing situation, your traditional office lease means you’ll be paying for space, whether you need it or not.
Lack of operational agility
In today’s competitive landscape, organizational agility is crucial. Businesses need the ability to respond quickly to market changes, pivot strategies, and experiment with new approaches. Inflexible office spaces with long-term commitments hinder your ability to adapt.
Costs for getting out of a lease
Last but certainly not least, you need to consider your options for breaking a traditional lease and the costs that come with them.
You may choose to sublease the office space to another party. This involves finding another tenant, referred to as a subtenant, who will take over the remainder of your lease.
To do this, you will need to hire a broker that will change anywhere from $2 to more than $5 per square foot per year (paid upfront) to find a suitable subtenant to take over your rental obligation. Note that, in most cases, your company will need to stay on the lease in case the tenant does not pay rent.
While this can help offset the costs of the lease, it’s important to review your lease agreement to ensure subleasing is allowed and to follow any necessary procedures including obtaining landlord approval.
And again, what is the cost of the C-Suite time required to hire a broker, negotiate a sublease, negotiate with the landlord, and organize a move? Worst of all, this is likely coming at a time when the company will need the C-Suite to focus on its core business.
How flexible office spaces make it less expensive to change your mind
That means you can get the space you need when you need it with limited up-front costs and c-suite time to find and run the space.
Flexible, serviced workspace allows your company to have workspace that works for your company, allowing your team to focus on their core competencies without distraction.
If you’re in search of a serviced flexible workspace that works for your business, book a tour of your local iQ Offices location today.
Kane Willmott is the co-founder and CEO of iQ Offices, the largest independent Canadian- owned co-working operator with offices in Ottawa, Toronto, Montreal and Vancouver. iQ Offices provides beautiful office spaces with safety, service, privacy and design at the forefront.