After Location, Square Footage Is Key

January 29, 2021

Location is widely agreed to be the most important characteristic of real estate from a buyer’s perspective. This is true for both residential and commercial properties. Buyers of all kinds will always narrow down by location first.

But after location, what is the second most important part of a property?

Most real estate experts agree that square footage is key, followed by the layout of the building.

Understanding Square Footage

When measuring CRE, developers and leasing agents usually refer to the BOMA International standards. BOMA lays out the standard practice for measuring the usable square footage for different types of buildings. Standards are useful for eliminating any confusion about how square footage will be measured for a lease.

While all buildings have their total square footage, there are other relevant square footage metrics for CRE. The most common are usable square footage and rentable square footage.

Usable Square Footage

Usable square footage refers to the actual space a tenant is renting on your property. For example, if a tenant is leasing an entire floor of your office building, the usable space on their lease might include the square footage of the whole floor. If they are leasing only a few specific offices, the square footage of each office would be added together for the total usable square footage.

Rentable Square Footage

Rentable square footage refers to the total space included in the lease, calculated as the usable square footage plus any additional shared space. Shared space can include common areas accessible by all tenants or a shared load for buildings that provide service to the usable square footage.

In practice, this means that the tenant in the example above who is leasing out an entire floor may also have additional square footage on their lease to account for common areas such as the lounge, outdoor space, etc. The tenant leasing only specific offices may have proportional square footage added to their lease for use of the same common areas as well as hallways and access points.

Why Square Footage Matters

Square footage is one of the main components in pricing CRE rentals. Tenants for office, retail, and industrial properties often pay per square foot. If you’re purchasing a property, you need to know the total square footage, plus the breakdown of usable square footage from that total.

Rentable square footage is negotiable on most commercial leases. Unlike usable square footage, rentable square footage can be adjusted based on the tenant’s actual usage and their lease agreement.

It’s easier to calculate potential returns for a CRE properties when you can understand the breakdown of usable space versus common space out of the total square footage.

Limitations of Square Footage as a CRE Metric

Simply knowing the square footage of a building won’t tell you everything you need to know about it. Square footage doesn’t tell you much about the function of a specific space. It’s difficult to directly compare an open office space with divided offices, even if their usable square footage is the same.

CRE investors need to keep an ear to the ground to look at what else their tenants might be looking for beyond square footage, such as the more dynamic office spaces used by remote work teams.

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