Understanding the 'Loss Factor' of an office space

You can't tour office space in NYC without quickly hearing the term "Loss Factor." In commercial real estate, the "loss factor" refers to the difference between the rentable and usable square footage of the same space.

The usable square footage of an office space refers to the measurable area the tenant occupies within their suite. But the usable square footage is typically not quoted by landlords or in a broker's marketing materials. 

So then, what does rentable square footage mean? The rentable square footage of an office includes not only the usable square footage within the walls of the tenant's premises but also contains a proportionate share of common areas, such as hallways, restrooms, elevator banks and lobbies, stairwells, and other shared spaces for use by all tenants in the building. 

Tenants should be aware of the loss factor when touring office spaces, although it is typically not a negotiable point. It's simply a strategy that landlords devised many years ago to lower the perceived price per square foot. Because when you add the extra, rentable square footage to an office space, the price per square foot, in turn, decreases. 

The joke is that landlords use a "rubber ruler" when measuring office space. 

It's slightly more involved than calculating the difference by percentage between the rentable and usable square footage. Here is the formula for computing the loss factor:

• Loss Factor = (Rentable Square Footage - Usable Square Footage) / Rentable Square Footage

To use this formula, you must know the rentable square footage and the usable square footage of the space you are considering. You can find the rentable square footage in the property's marketing materials, but you will need to measure the office space to determine the usable square footage. 

Once you have these figures, subtract the usable square footage from the rentable square footage to determine the amount of space that is not usable by the tenant. Then, divide this amount by the rentable square footage to get the loss factor as a percentage.

For example, if an office space has rentable square footage of 3,000 square feet and a usable square footage of 2,000 square feet, the loss factor would be 33.3%.

• Loss Factor = (3,000 - 2,000) / 3,000 = 0.333 or 33.3%

This means that 33.3% of the rentable square footage lies outside the walls of the office space.

Landlords do not provide the usable square footage of office space. Why is that? Two reasons. One, they would like prospective tenants to calculate the price per square foot based on the rentable square footage - i.e., the lower number. Two, and perhaps more importantly, they don't want to provide inaccurate information for legal reasons. If five people measure an office space, they're likely to arrive at five different figures. 

The loss factor for office space in New York City can vary depending on the building and the amount of space a tenant occupies within the building. For example, a full-floor office space has no common hallways other tenants can access. Therefore, the usable square footage will be higher - and the loss factor lower - than if there were, say, four tenants on the same floor with hallways connecting the offices and shared bathrooms. In the multi-tenant scenario, the usable square footage will be lower and the loss factor higher.

But, in general, loss factors for office spaces in NYC tend to range from 20% to 40%. In prime office buildings in Midtown with tenant amenities, large Class-A lobbies with many elevators, and extensive common areas, loss factors can be on the higher end of this range. Size also matters. And the loss factor for large tenants tends to be closer to 20%, while for small tenants, it can be closer to 40%. 

Comparing the loss factors of various buildings is like comparing apples to oranges... to tacos. The best approach for finding an office space for your company is to tour multiple office buildings. And once you've identified several office spaces that meet your company's requirements, compare the annual costs and tenant improvement allowance (TI) with the overall quality and suitability of the office space. 

In short, forget about the loss factor (but know it exists).