The true cost of occupying office space
If you were to use our headline as a search term, you’d find very little to answer the question that’s implied. This, from Zoopla, is one of the better pieces – at the least it refers to things like energy costs.
However, if you agree a conventional lease on office space, you’ll perhaps be surprised to discover that the most expensive thing you contract for is likely to be your cleaning. The Zoopla piece does not mention it and it’s never highlighted – perhaps because ‘dirt’ is not something we want to think about too actively. Or perhaps it’s because cleaning contracts conjure a picture of poorly paid, often exploited, usually women employees.
However, when researching this broad area for our investment in The Racquets Court, it became clear that cleaning is either first or second on the sorted list of costs associated with occupying an office. The only cost that cleaning might compete with is connectivity – I’ll come back to that.
With all of this in mind, let’s look at the TRUE cost of office occupation – both the tangibles and the intangibles.
In what follows, we’ve assumed an office space of 1,866 square feet – coincidentally, the space on the first floor of The Racquets Court.
The unskilled nature of cleaning leads to exploitation and cut-throat competition amongst companies. The following breakdown is on a cleaning company’s website; I’ve updated the salary cost to reflect the current minimum wage and assumed 2 hours to per day for a space that houses around 20 people. This will include things like emptying waste paper bins, keeping paper goods topped up and so on.
|Hours||Days||Per week||Per annum|
|Pay per hour||£8.21||£90.31||£4,696.12|
|Company service charge||£800.00|
So, around £7,000 per annum or £3.75 psf. In The Racquets Court, we’ve decided to employ our own cleaning people. They are paid £10 per hour and their terms and conditions are the same as others we employ. Broadly speaking, we’ve chosen to apply the margin that a cleaning company might enjoy to the package enjoyed by the cleaners themselves. This does represent a management overhead for us, but one that we think is right.
Usually around £6 psf in Newcastle, this will cover things like cleaning and lighting common areas, the rubbish disposal contract, insurance and so on.
Coffee / tea / staff maintenance
OK, you may not choose to provide this, but if you do, you’ll find it costing around £5 pcm per employee to which must be added the overhead associated with providing decent coffee making machinery. This will total around £0.90 psf.
Gas / Electricity
One of the more difficult to forecast but for a business employing around 20, the total power bill is around £6,500 per annum. See here for some detail on that. In our example, power will cost around £3.50 psf.
In Newcastle, rates add between £7.50 – £8.00 psf. So, let’s assume, £7.50
The main costs here are set-up and ongoing. Let’s assume a modest £500 per annum or £0.30 psf.
The Racquets Court connectivity has been well documented. We have a gigabit bearer which is set to deliver 200Mb upload and download. Of course, we can scale beyond this if required. Achieving this routinely with providers (if it can be achieved at all) would require a leased line. There are many providers but this one is representative. The cost is around £300 pcm for a 36-month contract. However, this does not capture the additional costs involved (e.g. firewall). Conservatively, we’d estimate the costs over 36 months to average around £,6,500 per annum or £3.50 psf. For those interested, this is an informative thread on the subject.
Back office management
Yes, things go wrong. The gas meter reading is weird; the coffee hasn’t turned up for the coffee machine; the maintenance contract on the leased line isn’t delivering; why are those calls being charged for on the phone invoice. And there are around 100 invoices per annum to pay on the maintenance and management of office space for around 20 people. We estimate that this requires around 15% of a person’s time (a bit less than a day per week). This is NOT a simple clerical task – dealing with suppliers who are business critical requires a degree of skill. We assume a total salary bill for such a person (including on costs) to be £25,000 per annum. 15% of this is £3,750 or £2.00 psf.
Summary of tangible on-going costs
If we add these costs, we come to £27.45 psf – the sum to be added to the rent psf.
Fit out – tangible but spread out
The Racquets Court fit out is very high quality and includes high specification meeting room facilities. This site shows that furniture etc will cost between £1000 and £2,500 per person. The Racquets Court is towards the top end of this. Let’s assume the most basic provision – for around 20 people, this represents a cost of around £25,000 to include meeting room facilities. If we assume depreciation over 5 years, this is £5,000 pa or £2.70 psf.
Cabling for connectivity also represents a one-off cost – obviously written off over the life of the occupancy. We’d estimate Cat6 cabling for around 20 people to cost around £3,000 or £0.53 psf over a (say) 3-year lease term.
Additionally, there is a fit-out cost – perhaps carpeting, perhaps, kitchen equipment, perhaps a wall or two. Knight Frank estimates an allowance of £30 psf for this – if it’s necessary.
Representing both a tangible cost and an intangible cost are ‘dilapidations’ – restoring your space to the condition in which you found it. This is impossible to forecast but it represents an intangible cost as well as a tangible one because it’s often a hassle and often goes to some kind of arbitration.
The intangible costs
There are two very significant intangible costs associated with the occupation of office space.
- The interaction of business need with supplier contracts. You will have contracts for all of the services you need. The space itself will be the most onerous of the contracts – once you’re in, it’s difficult to leave. If you install a leased line, your commitment is considerable – both to your location and to the lengthy contract required. You may be able to agree short term contracts elsewhere, but usually they’ll be 12 months at a minimum.
- The management of the space. We’ve accounted for this in our costs (£2.00 psf) but alongside a £ allowance, there’s the sheer effort that goes towards managing the space – which has nothing to do with the business you are actually pursuing.
In short …
… the rent per square foot is usually the least costly element of the occupation of an office space. Add in the other tangible and intangible costs and it is clear that flexible, service led space is an attractive option.