Three years ago, Dunstan Peter launched a business in the basement of his home in suburban Brampton, Ont.
Two moves to larger office spaces later, he has 120 employees and an aggressive expansion plan, and he’s negotiating to buy his own commercial building on the west side of Toronto.
“I never could have foreseen how fast we would be growing,” says Mr. Peter, president and chief executive officer of the green energy, automation and quality control company Trinity Tech Inc.
A space squeeze is a common plight for fast-growing companies. As office rents escalate in most Canadian cities, the trend is to jam as many desks as possible into existing spaces. But eventually fledgling companies must face the fact they have outgrown the nest.
For entrepreneurs, accommodating a growing staff may prove every bit as challenging as building the business. Here are six factors they should keep in mind.
“It’s almost a given that companies that have started up in small spaces on the fringes of cities get surprised by the prices of urban office space,” says Lee Billinkoff, senior vice-president of office leasing for Cushman & Wakefield Canada in Toronto.
That’s why businesses are moving toward open-concept spaces rather than offices or cubicles. Where a decade ago companies planned for 250 square feet per person, the average is less than 150 today, and in some cases just 100, Mr. Billinkoff says.
But packing work spaces densely together can create costs, particularly for tech-intensive companies, cautions Colin Scarlett, senior vice-president of Colliers International in Vancouver. “If you put more people in less space and they’ve each got computers and monitors running, that creates the need for more power and more air conditioning because of all the heat generated by the equipment.”
Mr. Scarlett has seen some clients spending as much as $500,000 to install power substations and cooling equipment in buildings they were leasing.
Key considerations here are lease costs and where you do business, but a growing issue is where your most valuable employees live, Mr. Scarlett says.
He recently worked with a company in downtown Vancouver that was planning to move to the suburbs. “They shifted plans and looked for a bigger space downtown instead when they discovered half of their staff would consider changing jobs rather than having to commute from their downtown homes.”
The cost of losing talent and the difficulty of attracting new talent is a major part of the equation, Mr. Scarlett says.
Employee input is becoming more important in relocation decisions, Mr. Billinkoff says. “You want your employes to feel they’re part of the process.”
In surveys that Cushman provides to its clients, employees are asked how they get to work, what amenities such as restaurants, gyms and shopping they would like nearby and the kind of furniture and office layout they prefer. Natural light and good heating and cooling are top priorities in all surveys, Mr. Billinkoff says.
For younger employees the “cool factor” is also important. “We’re seeing strong growth in demand for funky spaces like renovated brick-and-beam buildings as well as for environmentally certified work spaces,” Mr. Billinkoff said.
Lease versus buy
Mr. Peter has made the decision to buy his next office – a building practically across the street from Trinity Tech’s current home in Toronto. “I’m not a fan of renting. I like to have assets that I can use as collateral,” he explains.
But he’s a rarity in the office space world. “I’d say 99 per cent of companies lease rather than buy,” Mr. Billinkoff says. “The main reason is that if you’re buying for 100 employees and you outgrow the space, you need to sell it to move.”
And in downtown Toronto, if you find a small commercial building on the market, you’re likely to be bidding against condo developers or investment trusts that have deeper pockets. “Companies can get a better return on investment by investing in their business,” Mr. Billinkoff says.
Some fast-growing companies are undertaking short-term trials of rented offices, says Wes Lenci, Calgary-based vice-president of Canadian operations for the furnished office space provider Regus PLC.
The Goldilocks issue
In the early 2000s, fast growing tech companies would sign leases on spaces much larger than they needed with the expectation they would grow into them. That proved to be a bad strategy in the tech bust, Mr. Scarlett notes.
“Today if you need space for 100 and you think you might grow, the advice is to get space for your current needs in a building where you have the ability to grow later,” he advises.
You should check the status of the neighbours’ contracts, though, because your ability to grow will be limited if the adjacent spaces are on long-term leases, Mr. Scarlett says.
Making the commitment
If you think lease costs are destined to only go up, sign the longest lease possible, Mr. Lenci advises. If you think the market is stable, try to ink a two- or three-year deal, or a 10-year agreement with a clause that lets you break the lease at five years.
Mr. Billinkoff urges caution. “I believe growing companies shouldn’t go more than five years. From a capital-cost perspective most growth companies will write off their improvements on a short-term basis anyway.”
A short sublease from a company that has more space than it needs can be a money-saving option, but the risk is that lessee can take back the space at any time, Mr. Lenci says.
A move should be planned in consultation with managers as well as employees. Here are issues management teams of any size should discuss before committing to new office space:
- Do you see opportunities for consolidation or integration?
- How can we improve office functionality and utilization, including allotment of space, type of work areas and customer facing areas?
- Describe how office locations are selected now. Do you consider geography, business, people, brand and customer? What’s the best way to determine priorities for future locations?
- How are you measuring the performance and value of operating each office?
Source: Cushman & Wakefield