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Growth Spurts: What to Do When Your Company Runs Out of Space

By Scot Ginsburg

Are you suffering from growing pains? That seems to be the ongoing buzz these days. Companies are raising money, increasing revenues, and hiring additional people. This presents the million-dollar question: How much space should a growing company lease?

As a rule of thumb, office tenants generally budget 250 square feet per person and biotech companies budget 250-300 square feet per person. In large part this is dictated by parking availability. However you may not know how many additional people you need to budget for over the life of your lease.

In a perfect world a company would be able to bite off small chunks of space piece by piece as they grow. Unfortunately, it rarely works out that way. Tenants in the middle of their lease term who find themselves out of space are sometimes against a rock and a hard place. Provided the current landlord has space available in the building, however, it’s an easy fix.

Businesses in need of expansion space to satisfy their growth spurts should contemplate the following tactics and strategies to help alleviate the burden:

1. Use a Short-Term Band-Aid

Bite off small chunks of space in the building or project you are located in (pending availability) if you have 2-3 years left on your lease, or are looking to rent office space nearby. While this may not be the perfect solution due to inefficiencies, this short-term fix may be the best way to go if you can’t reach an agreement with your current landlord to occupy additional space for the duration of the main lease. This is especially true when your company’s lease is nearing the last 12-24 months of expiration, or if costs and monetary obligations are of particular concern.

2. Avoid Non-Coterminous Leases

Landlords love nothing more than to rent additional space to their tenants. Most landlords will view a tenant with a long-term lease in place as a captive audience with little negotiating leverage. Because of this, it is likely the landlord may not want to line up the expiration dates, but it is crucial that you make sure the expansion space expires the same day as your existing lease. Otherwise it will be a cumbersome venture when a relocation or renewal occurs, since dealing with two different lease expirations hinders a tenant’s “free agency” and ability to develop future negotiating leverage.

3. Evaluate Alternative Options

If a landlord can accommodate its tenant’s space need in the building, it’s almost guaranteed that any future expansion space will be at a higher price due to the captive audience syndrome. Comparing alternative market options that can house a company’s temporary space constraint are a must. If economics are your top priority, considering leasing space nearby from a different landlord is almost a sure bet to obtain greater concessions from your current landlord in the expansion negotiations.

4. Consider Subleasing – But Be Careful

I’ve seen this hundreds of times. A company is convinced its space can be sublet in no time and is encouraged to lease larger space elsewhere. The space is placed on the market for sublease and a new lease is executed. Shortly thereafter, they realize their space will sit on the market for 6-9 months or longer without any income. Not to mention other disposition costs such as a discounted rental rate, legal fees, brokerage fees, and tenant improvement costs. Unless economics are low on the priority list, take the time to perform a conservative disposition analysis to sublease your current space.

5. Understand Your Expansion Rights

“We negotiated an expansion right when we moved in and now that we need the space our right is void.” Sound familiar? Most landlords hate giving expansion rights, so if you were savvy enough to obtain an expansion right it was most likely a “Right of First Offer.” These rights burn off quickly. Next time negotiate a “Right of First Refusal,” which is more likely to be valid for a longer period of time throughout the lease term. This expansion right is often difficult to obtain in a landlord’s market like the one we’re in, but if you are large enough and have enough leverage when going into a new building, make sure you fight hard for the refusal right.

6. Reconfigure Your Space

Depending on the existing furniture layout, reconfiguring workstations and doubling up people in private offices may be a cheaper and easier way to solve space needs. Compare this to your other alternatives and often times you will find it is less expensive than renting new space.

7. Get Serious About Space Programing

Extract pieces from the business plan that correlate to headcount for the first, second, third, fourth, and fifth years. If five years is too long then use three years. Figure out specialty areas, departments of growth, and use type. Use general rules of thumb, as mentioned above, to hone in on the number of square feet per person to account for total space needs each year. Far too many companies ballpark their space needs and find themselves with too much or too little space in the early stage of their lease.

While there is no perfect solution when a business runs out of space, the strategies above can help alleviate some of the heartburn when dealing with this issue. And if you’re still struggling, take heart: It’s better to be in the position of needing more space than carrying excess real estate, which eats into your bottom line. Either way, make sure you have a tenant rep broker who you trust to help evaluate your options and make the best decision for your company.

This article originally appeared in SD Metro Magazine

Scot Ginsburg is a senior vice president of Hughes Marino, a global corporate real estate advisory firm that exclusively represents tenants and buyers. Contact Scot at 1-844-662-6635 or scot.ginsburg@hughesmarino.com to learn more.

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