The Commercial Real Estate Blog

What is the loss factor in commercial real estate

There is usually a large square feet block in each rentable office space that a person cannot use or in some cases even find, but the tenant still pays rent for this area. The difference in the percentage area that is usable and rentable is commonly known as the Loss Factor.

What Type of Loss Factor is Acceptable?

This is where it becomes more interesting, because the loss factors vary from one building to the next, and in some cases even from one floor to the next. It is possible that the loss factor is 40% in a modern-day tower and 15% in a smaller-type property, for instance. The loss factor is not available to the public and the only way to find out what it is, is to measure the rentable and usable office space and comparing the different square footages.

Practical Example

Let’s look at a floor with a size of 4,000 square where there are 400 square feet dedicated to mechanical and janitorial closets, and washrooms, for example. The loss factor in this case would be 10%. Should someone be interested in renting 2,000 square feet of office space on this floor the rentable square feet would be 2,200, even though the office space measures 40 x 50 square feet. The rental rates charged would be the market rates that are based on the rentable area, and not the usable square footage. There are various other factors that influence the final loss factor, but the above sample is the most important part of it.

What are the Universally Accepted Standards for Determining Loss factors?

There are no real established standards when it comes to determining loss factors for office space. In practice, most landlords settle on loss factors according to what the current market can bear. Because of this, the rentable area has almost no relation to the usable space. The total area of floors often “grow” suddenly following a change in the agent that handles the landlord’s affairs, acquisition of a property, or the relocation of an important tenant.