Commercial Real Estate News / Leasing/Renting / A Guide to Budgeting for Retail Space

A Guide to Budgeting for Retail Space

Published: 10-18-21 Category: Leasing/Renting

Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.

This article was updated on 10/26/23.

Among the many expenses of running a business, getting retail space for rent may be one of the biggest. Preparing your business budget for retail space will save you from unnecessary financial stress.

When you sit down and research where you'd like to set up your retail space, look for estimates on how much space and utilities will cost you every month and every year.

To get a solid idea of exact pricing, start talking to landlords about potential space you'd like to rent for your business.

Let's look into some other ways you can budget for your retail space.

#1 – Calculate Average Monthly Rents Near You

You can calculate the average monthly rent for retail spaces for rent near you by taking the average price per square foot and calculating it against the total number of square feet you're looking for.

For example, if you're in San Francisco, you can expect the average commercial price per square foot to be $36. Let's say that you're a boutique clothing business and need about 1,000 square feet of retail space to operate.

Take 36, the price per square foot, and 1,000, the square feet, and multiply them. The number comes out to 36,000.

Now, to determine the monthly cost of rent, divide 36,000 by twelve, which represents twelve months. That would calculate to $3,000.

By taking the average price per square foot, you can determine that your space in San Francisco may cost you about $3,000 per month.

Additionally, you can partner up with a commercial real estate broker who can find great deals for retail space for rent with the features and price you would like.

#2 – Examine Lease Varieties & Terms

Rent will take up most of your business budget. However, when shopping for space, watch out for terms that include other expenses that will rack up the price.

One example is a triple-net lease. You can find these on listings that say "NNN" on a rental rate.

A triple-net lease means that the landlord will charge you for taxes, insurance, and maintenance. This significantly brings up the monthly price of commercial space.

If a space costs $36 per square foot to rent, and the NNN is $4 per square foot, then you will be paying $40 per square foot. This brings the monthly rent of a 1,000-square-foot space to $3,333.

NNN fees aren't significant, but along with other expenses, you will be looking at a higher rent price than just the base price.

Other commercial leases include:

Full-service or gross lease: Includes utilities, taxes, insurance, and other costs that make renting hands-free.
Single-net lease: Landlord passes on property tax fees.
Double-net lease: Landlord passes on property tax and insurance fees.
Modified-net lease: Expenses that are passed on from the landlord can be negotiated.

Then, there are other expenses to furnish and maintain your retail space.

Don't Forget to Account for FF&E + Utilities

As with homes, your retail space needs furniture, fixtures, equipment, and utilities. For restaurant businesses, the equipment can be a costly but necessary expense.

Map out the estimates for utility usage and equipment needs to add to your budget.

#3 – Plan for the Unexpected

Just like you would for your car, maintaining an emergency fund for your business will prevent you from having to compromise your rent budget.

Physical Additions to Your Space

Physical additions may include office space, windows, and other structural changes. If you think that you may want an eventual change in your space, ask potential landlords about improvement allowances or go through leases to see if the space you're looking at can accommodate.

Early Lease Termination & Renewal After Expiration

Either you or your landlord could have the ability to terminate a lease early. This could happen due to economic hardships or other reasons. However, depending on the state, laws can protect tenants from early termination filed by the landlord.

Talk with your landlord beforehand about how they'd want to go about your lease after expiration. Terms may stay the same or there may possibly be room for negotiation.

Higher Manufacturing Costs & Supply Chain Shortages

The Coronavirus Pandemic and political disputes between nations have caused supply chain disruptions that drive up the costs of certain materials. These materials include plastics and metals that are present in thousands of daily products.

Business owners are at the brunt of these shortages and disruptions. They may not be able to keep up with the demand, and the items they've provided cost more than before. Making rent can become a stretch.

#4 – You're Still on the Hook if Your Business Fails

As much as you work hard to grow your business, there are involuntary changes in life that can disrupt your operation.

Keep this in mind when searching for spaces because there are landlords that allow or will negotiate a subletting situation.

Subletting or subleasing means that renters can let somebody else use and pay for the space, even while the original renter has the lease in their name.

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