Rent to Revenue Ratio in Real Estate Location Decision Making

Many companies use several benchmarks when evaluating the economics of a real estate leaseā€¦

  1. Cost per SF
  2. SF per person
  3. Cost per person

But many times these are not enough. Savvy providers today are utilizing the rent-to-revenue ratio. This is defined as the percentage of sales from your business that you should be allocating toward occupancy costs, specific to your industry type. Every industry has different percentages and this is something that TDKCA can help benchmark. The average range can from 3% to as high as 14.5% for law firms or other professional services organizations.

It has been said that utilizing this metric is effective in that it:

  1. Provides and enhanced metric to provide you with the key economic data you need to justify an investment in your workspace
  2. Choosing a prime location that trends your RTR ratio downward at first may be worthwhile if the real estate location yields higher revenue, thus balancing the rent-to-revenue ration within the boundaries of normal for your industry.

Companies have historically focused on the cost side of equations when making real estate decisions. Little thought was put in to the rent-to-revenue, as a percentage, in making solid real estate decisions. As revenue increases, there is a greater flexibility in weathering an error in the RTR calculation, however, when there is a downward turn in revenue, the painful realization that attention to RTR was not factored in to the decision making process of workplace selection becomes more than evident.

Adding rent-to-revenue ratio metrics into the decision making process of selecting the proper location can be a valuable tool.