Is Your Rent-to-Revenue Ratio on Spot for Your Business?

When looking at financial analytics for occupying commercial real estate, most tenants and business owners will be focused on the following: monthly rental obligations, total lease commitments, rate escalations and landlord expense pass-through’s to the tenant.

These numbers can be broken down into either “cost per SF” or “cost per employee” ratios for analysis and comparison. But what tenants and company leaders should also be interested in for their bottom line analysis is their industry rent/revenue ratio.

Similar to the rent/sales metric used by retailers and shop owners to calculate the feasibility of a location based on sales needs, the rent/revenue ratio is a great way for other business types to find out if their current or future space fits in line with their specific industry’s standard revenue ratio for rent obligation.

In Raleigh and the Triangle where industries like professional services, technology, biotech/pharmacy and R&D dominate job growth and employment numbers, it is all the more important to focus on their rent/revenue ratio.

You want to know two things:

1) Whether or not you are paying too much for your space and maybe even more importantly

2) Whether your company is falling behind the competition and industry standard rental ratio targets (this may mean you may have potentially outdated and amenity lacking space)

Human capital continues to be the best investment to differentiate and best your competition. To retain the best talent in today’s market, knowing how your rent ratio stacks up to the industry’s standard can help CFO’s and company leaders make informed decisions about improving their space or investing in better office amenities and attractions.

Typical rent to revenue ratios range from 2 - 15% but here is a general list of what each industry leader should be benchmarking their rental commitments to:

Manufacturing 2.5 - 4.5% (depending on size)

Financial firms 2.0 - 3%

Professional services 2.5 - 4%

Media/broadcasting 2.4 - 2.7%

Healthcare 2.5 - 4%

Legal 8 - 18% (varies)

In the end, the rent to revenue ratio is just one of the many metrics in determining if a space is the most effective and smartest investment for your company and employees.

To engage a full analysis and drive the best real estate decision to help more than just your bottom line, engage a corporate real estate expert like myself and the team at Colliers!

- Capital Compass