You’ve done the initial legwork. You know your target market and the product or service you’re going to sell. But you’re still undecided about where you want to set up shop, and the decision shouldn’t be taken lightly. From street visibility and foot traffic to the cost of commercial real estate, choosing the right space makes a big impact on your bottom line. It really does come down to “location, location, location.”
Calculate Your Budget
If you have a few specific locations in mind that fit your budget estimate and preferences, purchase reports for those areas to get more details. Reports from places like Cushman & Wakefield or Reis give you deeper insight into rental rates, vacancy information and lease terms, as well as comparable properties nearby.
You already know that the cost of space differs between states — the rental cost per square foot in Atlanta is one-sixth of what it is in New York, for example — but there are other cost variances that make a difference as well. The cheapest choice isn’t always the right choice. Being on the “wrong side of the railroad tracks” could be at your business’s detriment. If you don’t get enough foot traffic you won’t get any customers to help you turn a profit. Too many competitors in the same area could also be affecting your sales.
Consider how an area feels
If you need more convincing, the same way residential neighborhoods have a different feel from one to the next, so do retail spaces. An industrial office park or strip mall on a main street attract a different crowd than a quaint storefront on a side street. Make sure your location matches your brand image and your target market. For example, if you’re a one-of-a-kind boutique, a strip mall full of chain stores may turn off your customers.
Don’t forget about minimum wage
Consider minimum wage for the area, too. The federal minimum wage and state minimum wage can be found on the Department of Labor site. For many areas, there’s also a city minimum wage. As an employer, you’re required to pay employees whatever is the greatest amount of these three. For example, in San Francisco, minimum wage is $13 an hour, while just an hour south in Sunnyvale, it’s only $11 an hour. Though you may not have any employees just yet, as you determine where you’ll set up your business, you’ll want to think about the costs of employing a team as you grow.
Note the incentives
Some areas also offer incentives for businesses that bring economic development to certain areas. These can include tax breaks, incentives and exemptions. In Chicago, for instance, businesses that add jobs to the community are eligible for grants, loans, fee waivers, tax reductions and land-write downs. They could qualify for a reduction in real estate assessments, real estate tax incentives for new construction or substantial rehabilitation, and much more.
All of these reasons show why the lowest rent may not be the whole picture when it comes to calculating your budget. There may be other costs, fees and taxes that cost more, or there may be incentives to locate your company in a different part of town that will be beneficial in the long run.
Determine Your Space Needs
Determine space per employee
Inc. says each employee in an office setting will require 200 to 250 square feet; usually more for executive offices, and less if loft-style workspaces are used. If your office hosts many client meetings, this space per employee increases.
Consider parking and loading
Besides the building, you will need enough parking spots for both employees and customers, plus easy access for couriers, delivery trucks and their equipment. Cities and counties have their own rules regarding loading zones, number of spaces needed and the number of handicap spaces available, so be sure to check with your local business center and the American Disabilities Association for regulations.
Think about the times of day you’ll be the busiest and when the demand for parking might be at its peak. Will traffic be different on weekdays versus weekends? If you share a parking lot with a restaurant, for example, you might find your customers struggle to find parking spaces on weeknights. Consider the available street parking or how or if you’ll reserve parking specifically for your customers.
Know your storage needs
Consider multiple locations if it’s better for your business financially. If you’re a retail space, think beyond the showroom floor. What space do you need in terms of storage and back offices? Small Business Development Centers recommend using 80 percent of retail space for merchandising, and using low-cost rental space for distribution and offices.
Find your rent-to-sales ratio
Capital Retail Group, a commercial real estate brokerage, says the base rent-to-sales ratio is between 3 and 20 percent of annual gross sales. Since you’re just starting out, you may not have an idea of what your projected sales are. But as you round out your first year, you’ll be able to plan for your next.
Determine your ratio by dividing your annual rent by your forecasted sales.
If you’re paying $5,000 each month for rent and your projected sales are $500,000 for the year. Your ratio would be 12 percent. If you run a retail business, you should keep your ratio between 5 and 10 percent.
Do you need a physical location?
Space is a little different for businesses that sell services rather than products, or sell products but not from a storefront. For example, a technology company whose entire team can work remotely may want to forgo renting an office space altogether, and instead rent conference room space when they need to work with clients face to face. For businesses that require in-person collaboration and creative brainstorming, a physical space may be warranted even though there is no price tag on the work that is being done.
Account for the Potential Extra Costs
As you go about your location hunt, remember all the extra costs associated with a brick-and-mortar location.
What does the space need before you can move in? You may have found the perfect location but if the space needs some structural or aesthetic changes to make it functional — and make a good first impression on potential customers — you’ll probably want to adjust before you open your doors. Whether it’s as simple as a new coat of paint or as extensive as knocking down walls or reflooring, account for these costs. Before you sign a lease, see if you can negotiate coverage of some or all of the renovation expenses.
You know you need power and water and maybe gas, but if you haven’t considered the next step beyond that, do so before you plant your roots. If you have a choice between two or three power companies, research which has the best rates and be aware of plans that might charge you more for using power during “on-peak” hours.
Check out the window insulation. Double-paned windows will mean you’ll use less energy to cool and heat your space. Large spaces and high ceilings are open and welcoming but will take more energy (and money) to heat and cool. If a space has multiple stories, you may have multiple thermostats and since hot air rises, it’ll take more energy to cool the upstairs in the summertime.
Maintenance and janitorial staff
A landlord is responsible for keeping a space safe and in good order. Any structural elements are typically the responsibility of the building owner or management company — like if the roof starts to leak after a rainstorm or your A/C stops working in the middle of summer.
Non-structural maintenance and cleaning depend on the lease. Some places will offer low rent for a largely DIY maintenance policy. Others will do all the maintenance in exchange for higher rent. Before you sign, know what you’re willing and able to take on yourself. If your bathroom sink clogs, are you willing to pay for the plumber or roll up your sleeves and do it yourself? If not, find a lease that’ll take care of it for you and be prepared to pay the extra rent that comes along with that service.
If a customer slips on the floor and injures themselves, you’ll want to have the liability insurance to cover it. Your lease will determine what areas you’re responsible to maintain and insure. Work with a broker to determine the proper coverage for those areas.