How to Determine the Cost of Office Space

Let us assume for a moment that you own and operate a “typical” New Hampshire business. You have 10 employees and are searching for new office space but over the next five years you think there will be another 10 employees. You have projected the salaries of those new employees into your model moving forward. You have accounted for salaries, benefits and even for training and potential changeover. But what is the true cost of those employees as it relates to the facilities and what is that going to be over time?

We normally do not link our physical office space to cost per employee however it is just a short step to do so. Let us assume for a moment that it costs you $20 per square foot to occupy office space in New Hampshire. That includes your utilities, taxes, base rent etc. I choose this number because it is fairly representative of an average rent that most people pay, and more importantly… it makes the math easy. So if you are paying $20 per square foot to occupy your space, how much space do you need for your 10 employees and the 10 additional people to grow? You may say that a cubicle is 8 feet by 8 feet or 64sf total, or you may say that that private office is 10 feet by 12 feet or 120sf total.  Therefore one employee sitting in the private office costs you 120sf times $20psf or $2400 per year.

This however would not be realistic to the market. Each office needs hallways for access; conference rooms for meetings; kitchens for eating; receptions for clients; bathrooms for…. you get the idea.  If you are planning for additional growth you cannot simply use 64 or 120 square feet to budget.  So what number do we use? Let’s ask the federal government.  Seriously. According to a 2012 article the General Services Administration in conjunction with OGP Office of Real Property Management concluded that the average federal employee needs 218sf.

Say what you will about the feds, but this figure proves to be fairly close. A 2010 article by Roger Vincent of the Los Angeles Times discussed a number slightly north of 200sf per person, which has been declining over the years. In the 1970s, Vincent reports, employers had budgeted 500sf per person. Technology and work place styles have caused that number to be cut in half. The trend continues; think about your doctor’s or lawyer’s office, or where you work currently. Think about how trends have changed over the years and space as compressed.  If you are this hypothetical CEO looking for 20 employees, think about how many employees will have permit desks versus hoteling on a short term basis? What other efficiencies can you gain over time?

So according to the Times forty years ago office space cost 500sf times $20psf or $10,000 per employee and today that same space is 200sf times $20 or $4,000 per employee per year.  Should you consider that $4,000 or lower number when projecting out? Will the trend continue? Some experts have predicted the number to go as low as 50sf per employee by the end of this decade.  If you are signing a ten year lease can we project out that you are going to need the same foot print but double or triple the employee density?

In the end however the truth is somewhere in the middle. Yes technology and work style has compressed our need for office space, but let’s take into consideration a local investment bank in Boston reportedly shrinking its 1,000,000+ sf of office space into just over half that amount and not losing an employee.  In the end the macro trends and the size of this employer allow them to increase the density. In a company that large you can make assumptions about travel or time off.  They can host servers off site. They can cut back on the number of conference spaces or other gathering areas. However in the end if you are a small 10-20 person shop there are still things you must have. Perhaps you must have a conference or kitchen area or sever. Certainly you would not want to cut back on the hypothetical CEOs office. All of these things are not as scalable.

In the end, unless your business model calls for something else, plan on the following the government’s lead and hedge on the side of caution, 250+ per person is a good range. While 50sf may sound great from a budgeting perspective it may not be the best for recruiting as some jail cells are larger than that.