When Leasing or subleasing commercial real estate, rents are quoted as BASE RENT, but leases charge additional rent, and companies furthermore might have to spend additional time and money on construction, equipment, and staffing – and we estimate those costs at 159% to the quoted base rent.
We explain this below, and then in another blog: “What’s Included in Co-working Lab Package Prices” we try to compare the Lease/sublease against a co-working lab membership.
First, a quick regional rent reference:
In the Bay Area in Q2 2023, national Brokerage & Research firm CBRE produced a map of the AVERAGE asking rent for 20,000 square feet of lab in different markets (see Josh Nelson’s figure below). These are averages between high and lower rent submarkets (new construction in Emeryville was ~$2/mth or $24/yr higher, while existing space in Hayward was $1/mth lower). Markets move all the time, but let’s choose an average as an example and explain the costs that are not included in the first sticker price.
Real costs of renting real estate on your own are much higher – say 30-35% higher at the lease level, and perhaps 94% higher including amortized construction costs, and 153% higher including operational expenses..
How can that be? Let’s go a few steps further…
First, let’s convert from a 20,000 square foot space to talking about a 10,000 square foot space, so that we can talk in full dollar amounts and a number you can easily scale up or down.
Let’s pick the I-880 Corridor, and use the average rent of $5.19psf/mth NNN rent, or $62.28psf /year. Obviously then, the cost is $622,800 per year in Base Rent alone.
I. Additional costs in Leases (Or Subleases)
Now the first thing to notice is that it’s “Base Rent”. In commercial real estate leases, landlords charge a base rent, but then it’s often market standard for lab leases that tenants reimburse their share of property expenses like taxes, insurance, utilities, landscaping, etc. Landlords don’t control the cost of utilities, so they don’t want to get squeezed where they give tenants a fixed rent for 5 years, but then lose money if they have to pay utility costs and those expenses go up in a few years.
So the landlords will bill their tenants reimbursements of property expenses as Additional Rent on top of the Base Rent, such as this:
And when a 10,000 rentable square foot tenant looks at their annual costs, it looks like this:
The expenses might be a bit lower in older or less well-kept properties, but in newer properties with gyms and cafes, the reimbursements are higher. So let’s say that the additional expense may mean Total Rent is 25-35%+ above the quoted rent.
And keep in mind that when you are signing up for lease, it’s usually for 5 years of liability. You can get subleases for shorter times, but direct leases are 5-15 years. That might be the right choice for you if you have long term visibility and stable needs, but sometimes flexibility and NOT having a 5 year contractual liability helps manage your capital and overhead.
II. Costs (not to mention time) in Constructing Improvements in Leases
But that’s not all the costs that should be considered – there are also the costs to build the space, which we’ll ballpark below. We’re targeting a biosafety level 2 lab (BSL2), appropriate for biotech, microbiology, tissue culture, food tech, ag tech, but also flexible to allow materials science, battery research, and chemistry or small molecule pharma. The below might apply to genetics, biochemistry, cell culture, synthetic biology, Crispr technologies, or even pilot bio manufacturing.
You might be looking at space which is pre-built as lab + office, and only need to do light or medium renovations. Or, you might be looking at raw space with no demising or mechanical, electrical, and plumbing built. We’ll look at various types – but keep in mind that from a financial perspective, the total cost can be divided by say 5 years to estimate a “yearly cost” of the construction.
Also, your costs might be defrayed by the Landlord giving a “Tenant Improvement Allowance” – where they might give you money to fund part or all of the renovations. But note – they will cap this money so tenants pay for budget overruns. And they are essentially lending you the money – because the more Allowance money is given, the higher the rent. You won’t get $425 psf in allowance for a $5.19psf rent in the I-800 corridor. Landlords “give” you money upfront, but your higher rent pays them back, with interest.
The point of the table below is that Renovations on a 10,000 sq foot space can cost from $150k to $4.25m, with a yearly cost of $30k to $850k per year.
If we choose the midpoint of a Medium Scope Renovation to an existing space, the loaded actual annual cost is 94% greater than the quoted base rent.
So regarding leases, be prepared for expenses that aren’t mentioned in quotes of Base Rent. Your costs may vary and be lower or higher than these estimates, but you should be aware that a quoted base rent is just a portion of what your actual dollar expenses will be.
We also haven’t quantified the value of your time, or your team’s time, spent on project managing design and construction, but we’ll leave that to you.
The third part of this article considers some of the other expenses that companies have when they sign a lease for their own space, compared to “operationally assisted” spaces like in coworking, or an incubator or accelerator.
III. Operational Expenses: Lab Equipment, and Facilities Staffing
Setting aside the 10,000 square foot facility rent and construction costs, a science company then needs to purchase Lab equipment to go inside the lab. A basic list might look like this, including laboratory fume hoods, biosafety cabinets, PCR and qPCR machines, centrifuges. You might also add cell counters, cell sorters, or substitute dry glove boxes
Staffing the facility has more material expenses. Lab companies need
⦁ Environmental, Health, and Safety Compliance officers, and
⦁ if operating from a private leased space, might also want staff on hand to handle front of house reception/visitor check-in, shipping & receiving, facilities and equipment maintenance.
The next largest expense is utility cost, which can be in the $4 per square foot range since lab companies use more electricity than average tenants while running HVAC units for single pass conditioned air. Many other services like Janitorial can be contracted, so are smaller expenses in comparison. The operating expenses of a 10,000 square foot company in lab and office space might look like the below.
So in total, Companies who go it on their own in their own leased space might have expenses that total an increase of 153 % over the stated base rent in market reports, or in a landlords quoted rate.