Posted by Leonard Steinberg, President of Compass, on April 28th, 2015

Are companies re-evaluating office space rentals to become office space owners?

An affiliate of Ruder Finn the global public relations firm based in New York, has bought a five-story Sutton Place building previously occupied by antique and movie prop shop Newel for $30.7 million, that will become Ruder Finn’s new headquarters. The 34,000-square-foot property purchase at 425-429 East 53rd Street, between First Avenue and Sutton Place South, equates to a cost of roughly $900/sf. Assuming they will have to spend an additional $200/sf to finish out the space, their total cost will be around $38 million.

Assuming a company like this would have to rent space for around $ 75/sf, their annual rent for 34,000sf would have been around $2.5 million annually. Knowing that commercial space has a ‘loss factor’ of around 15%, their 34,000 sf may be the equivalent of 38,000sf or more, so their rent for that amount of usable square footage may be closer to $ 2,85million per year. Assuming rents escalate by 2% per year, in 10 years their rent could be north of $3,5 million per year. If Ruder Finn takes a 100% 30-year mortgage on this building at 6%, their annual mortgage payments will be around $2.76 million. Then there are the costs of real estate taxes and maintenance on top of that.

The building would be paid off completely in 30 years, yet over 30 years they would have paid around $100 million in rent…..and not own a building that surely will be worth lots more.

Why wouldn’t every company not want to own their office space?