Why most companies overpay for office space—and how not to

Here’s a commercial real estate riddle: Why must a company pay for 7,000 square feet of office space when it only needs 5,000? If you answered “loss factor,” well, congratulations, you’re well on your way to saving money on your company’s next lease. For those not familiar with the term, the following explanation of how landlords calculate office space may be the most important thing you read today.

Understanding Loss Factor

Understanding loss factor means first recognizing that commercial brokers and landlords use two distinct numbers to describe size: Rentable Square Feet (RSF) and Usable Square Feet (USF). RSF is a measure of the entire space, including useless parts like walls and shared sections, such as stairways and bathrooms. USF measures functional space exclusive to the tenant. Loss factor is the percentage difference between RSF and USF.

Calculating loss factor then might seem easy—subtract USF from RSF, divide by RSF and multiply by 100—but it isn’t, because the relevant values vary depending on where an office is located. In particular, New York City landlords use a standard of measurement that differs from the rest of the country. (Find a detailed explanation of the various calculations here.)

Unfortunately for tenants, loss factor is unavoidable, no matter where they are or how the calculations are made. “It has become the norm for a quote for retail square footage to have some loss factor,” says Robin Abrams, a retail broker for Lansco. “There is no absolute standard anymore.” Bottom line: Because advertised measurements will include space that’s shared or useless, tenants have to scout out places with more square footage than they’ve calculated they need.

6 Tips for Minimizing Loss Factor

But even as you account for the discrepancy, it is possible to minimize its impact. Here’s how:

1. Comparison shop in your preferred neighborhood. Buildings with sprawling lobbies, multiple stairwells and bathrooms, and lots of shared space have higher loss factors. So it pays to check out the layouts of several commercial buildings in the same area.  
2. Focus on total cost. Commercial real estate prices are mostly presented as “per square foot” costs. But you can—and should—ask for the total monthly rental cost to avoid the unexpected charges of unrecognized useless space.
3. Request for the RSF be specified in the lease. As building size is neither universal nor objective, this ask helps to guarantee that the agreed-upon square footage is legitimate.
4. Protect yourself from loss factor down the line. Landlords often do “space re-measurements,” recalculating for “better accuracy” or informed by new standards. Not surprisingly, this usually results in increased RSF—despite the tenant not actually gaining space—and, of course, a higher rent. You’ll be a hero if you lock down an airtight renewal option when you sign your original lease. That kind of proactive thinking will save your company a rent increase—or another move.
5. See the space through an architect’s eyes. An untrained evaluator might not recognize  “dead” spaces, especially in funny-shaped buildings. So ask to see an architect-prepared layout to get a better sense of the unusable space.
6. Get a tenant broker. Obviously, navigating loss factor-related issues in commercial real estate can be daunting. We are here to help. One of our experienced brokers will be happy to answer all your questions and help you get the most out of your office space.  

Get in touch with one of our brokers.