If you have ever had a conversation with a leasing agent or commercial broker, you may have noticed that there are seemingly multiple different types of space being talked about when talking about renting space for a use. In this article I will talk about those different types of space and how they are all related through a concept called a Core Factor.
Types of Space
In a leasing discussion you might hear the following terms:
- Usable Square Footage
- Rentable Square Footage
- Core
- Common Space
- Core Factor
In a multi-tenant space either residential or commercial, the usable square footage is the amount of space that you, the tenant, have the legal right to use exclusive of any other tenants. Usable square footage is equal to or less than rentable square footage. In an office the usable square footage is the space within the walls of your office suite. In an apartment, the usable square footage is the space enclosed by the walls of your unit.
In any rental situation, the rentable square footage is the amount of square feet of space that you are actually paying rent on. In some cases the rentable square footage can be larger than the usable square footage, but it’s never smaller. This difference in square footage usually only matters in a commercial lease when your rent is calculated on a per-square-foot basis. In most residential leasing situations you are paying rent on a per-unit basis, not a per-square-foot basis.
Why is there a difference?
The reason there is a difference between rentable and usable square footage is because some buildings, and most multi-tenant buildings, have a building core. The core is all of the space within the building that is required for the building to operate, but is not part of an individual tenant usable square footage.
The building core can include lobbies, hallways, bathrooms, elevators and stairs, back-of-house spaces, and other areas. These areas are necessary for the function of a building and some can be used by the individual tenants, but they aren’t part of the tenants individual usable space.
Calculations
The core factor is calculated by dividing the total building square footage by the usable tenant square footage. In a building with 100,000 square feet of space with 15,000 square feet of core space. The usable square footage in the building is therefore 100,000-15,000 = 85,000 square feet. If we divide the building square footage of 100,000 by the usable square footage of 85,000 we then get a core factor. The core factor is 100,000/85,000 = 1.176.
If a tenant wants 10,000 square feet of usable square footage in the building their rent will be calculated of rentable square feet with a core factor of 1.176 or 17.6%. The rentable square footage is therefore 11,765 square feet. If the rent is $10.00 per rentable square feet they will pay $117,650 per year or $9,803 per month.
The Building Owners and Managers association International (BOMA) typically sets the standards and definitions for what is considered tenant space and what is considered core space in a building.
When looking to purchase a building an investor can pay an architect or other consultant to conduct a BOMA Study of a building to determine the core factor.
Minimizing Cost and Building Efficiency
A building is considered more efficient the lower the core factor is. A more efficient building has a higher amount of rentable square footage for every total square foot in the building.
The more efficient the building and floor plate is, the lower the construction cost per usable square foot will be, all else being equal. It is important for designers to maximize the efficiency of the design and layout to maximize potential financial performance of the development.
When a building has a high core factor the effective rent for the tenant also goes up. If a rent is $10 per rentable square foot in two buildings and a tenant wants 1,000 usable square feet in a building with a 25% core factor their rent is $10×1000*1.25= $12,500 per year, or an effective rent of $12.50 per usable square foot. In a building with the same rent and only a 10% core factor, their effective rent is $11.00 per usable square foot, a 12% savings in annual rent!
Typical Core Factors
Core factors differ from one building to another and from one building type to another. It’s critical when looking at space to understand the core factor for the building and space you are looking at renting.
An office building has a typical core factor of around 15%. A shopping center can have a core factor of around 8%.
Because the doors on a multi-tenant warehouse typically open directly to the outside of the building, if there are no shared amenity spaces on property a warehouse can have a core factor as low as 0%.
Conclusion
Understanding the core factor of a multi-tenant building can have a big impact on purchase price in an acquisition, rental costs, and tenant upfit costs. Because the core factor can – and often does change – from building to building, it’s a number that is about as critical to understand as the usable square footage you are looking for. When looking at a larger usable square footage it might also be helpful to pay for (or ask the landlord to provide) an official BOMA study.
If you have any questions about core factor, or can think of anything I left out, feel free to reach out at [email protected]!
Exercises
- If the building is 100,000 square feet and the core factor is 25%, what is the total usable square footage in the building?
- What is the core factor on a suite that has a usable square footage of 12,000 square feet and a rentable square footage of 14,000 square feet?
- The usable square footage of your space is 3,500 square feet, the core factor is 18%, and the rent is $10 per rentable square foot per year. What is your annual rent payment?
