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What You Pay In Rent Doesn't Matter

Feb 25, 2021, 12:42pm EST

Think about the last time you went looking for a new house. What were the criteria you considered? Obviously, price factored in — you can’t go looking at multi-million-dollar houses if your budget doesn’t come close to that range. But my guess is that you were like the majority of homebuyers in that, in the end, price was a guiding factor, but it didn’t even make your top 10 list of deciding factors. More likely, you made your choice based on the layout and quality of the home itself, the neighborhood fit, traffic and commute patterns, long-term value, the tax rate, and most importantly, proximity to work, to quality schools, to friends and family, and to restaurants and leisure activities. Why do you suppose that is?

It’s simple: people choose their houses because they have a direct impact on the quality of their lives. The environment you surround yourself in matters a great deal. Which brings us to the next question: in an era when people are working longer and more flexible hours and the lines between work life and home life are increasingly blurred, why would your criteria for choosing an office space be any different? They shouldn’t be. They certainly aren’t any different for recruits. In situations where a talented prospective employee has a choice between two employers, he/she will choose the one with the better office space 10 times out of 10 — even in situations where the other employer offers a higher salary. And yet, in my experience running Burns Scalo Real Estate (BSRE), I can tell you with confidence that the majority of agents, brokers, consultants, and employers approach their search for office space in exactly the wrong way. When so many other factors like talent acquisition and retention, employee health/wellbeing/productivity, and neighborhood and cultural fit mean so much more, they still think about rent and price per square foot first.

Here’s the order that most employers place their criteria:
  1. Rent (or price)
  2. Total space
  3. Track record of the landlord
  4. Location
  5. Age of building
  6. Mechanical systems
  7. Technology
  8. Amenities
  9. Wellness and sustainability
  10. 1Employee recruitment/retention

Now, some of those criteria are in the right place. Space and location matter. And no one wants a bad landlord or building with underperforming mechanical systems and outdated technology. But I’m here to tell you that the bottom three — amenities, wellness and sustainability, and employee recruitment and retention — should be much closer to the top, while rent belongs on the bottom. There are a few reasons for this. First, there is the message your office space sends to your employees. I’ve asked this before and I’ll ask it again: do you think your employees care about what you pay in rent? Absolutely not. But do you think they care about how the office you put them in makes them feel about their day-to-day work life? Yes. Absolutely. In fact, there is no better way to improve employee morale and culture than putting your people in a space they love. Second, there are the productivity factors. If your employees have access to exercise, quality food, the outdoors, opportunities to socialize, and services that make their lives easier, then they don’t have to leave the office as often in search of these things. When people are happier, healthier, and actually present in the office, they work harder, and when they work harder, your bottom line improves drastically. Third, we have to consider efficiency. New data-collection capabilities allow the design of more efficient layouts for contemporary office environments, allowing you to streamline your space requirements by 10% to 20%. What this means is that you can rent a smaller, higher quality space and expect the same efficiency as you would receive in a lower cost, lower quality, larger space. Rent is a small percentage of a small line item

Finally, there is the matter of where your rent resides on the spectrum of expenses in your overall operating budget. For almost every company in every industry, rent is a small percentage of that budget. Our data at BSRE places the range between 5% and 7%. Meanwhile, the cost of your employees in terms of salary and benefits is almost certainly the highest percentage of your overall operating budget (where data suggests a range between 40% and 60%). So why base your office space decision on an expense that is essentially a drop in the bucket compared to your biggest expense — especially since study after study shows that better office space leads to happier, more productive employees? If you make a small increase in the rent you pay — let’s say you go from 5% to 6% of your overall operating budget — you can expect that increase to reflect directly in an improvement in productivity. Make one small change to one of your lowest expenses and you can expect an enormous improvement in the return you receive on your payroll expense.

Don’t make your choice based first on the rent bill; make it based on how your people will respond to the space you choose for them. Yes, business is about making money, and the rent bill plays a factor in that equation, but if it’s the difference between improving the bottom line and doing the right thing for your people, why not do both? Stop thinking about cost per square foot. Your rent doesn’t matter. Your people are what matter. Give them more of what they want and you will get more of what you want in return. Do this, and no one will complain about the space costing too much. They will be too busy enjoying the enormous return from more productive people who enjoy working together and delivering an exceptional work product to their employer.