Small Business: Small, But Not Too Small
By definition, small business companies are "independent businesses with fewer than 500 employees."
According to the 2022 profile from U.S. Small Business Administration, the total number of small business companies has increased by 0.6 million, a 1.9% growth (639,000 company counts) from 2021. 99% of the grown companies are those with less than 20 employees. Because their operation style varies, the spaces needed are also different, which shifts the commercial real estate landscape.
For the space-planning discussion, I put these businesses in two categories based on their building types.
Main Street Businesses
The first type of business is usually located on a town's principal street and forms a retail corridor in a district. Industries such as food services, retail trade, arts, entertainment, and recreation are considered in this category.
According to the 2022 small business profile, the main street type business with less than twenty employees constitutes 27% of total small business counts. These small businesses are essential for forming a good rapport with local communities. Moreover, they offer opportunities for local ownership. It is economically sustainable when these small businesses thrive locally.
Office-Oriented Businesses
The other type of industries are often placed in low-to-midrise office buildings but also can be found on a principal street. Such as healthcare, professionals, or real estate rental and leasing services. According to the 2022 profile, this type of business constitutes about 35% of the total counts of small businesses.
2022 small business profile in the United States shows that main street-oriented businesses constitute 27% of total small business counts. The office-oriented company is about 35%, more than a third.
What's the takeaway
When looking at the share of these two primary types of industries (the Main street-oriented and office-oriented company), we see a slightly different landscape in the District of Columbia.
2022 small business profile in the District of Columbia shows the office-oriented business is much higher than the national average, constituting 49.5% of the total small business (0-19 employees) company counts.
Though the number of small businesses in the District of Columbia is only a fraction compared to the nationwide small business counts, they have a much higher share of office-oriented companies. On the other hand, their growth in number does not reflect on the occupancy rate in office buildings, which might result from consistent rental prices regardless of the company's size.
A rule of thumb in calculating the potential rent that one company can afford is to allocate 5% to 10% of gross profit to the leasing cost per square foot. For example, the average asking rent is about $60 per square foot in the District of Columbia. For renting a regular 2000-square-foot office, the business has to make $600,000 to $1,200,000 of annual revenue to afford staying in an office in DC. The estimation looks like the following:
$60/ 10% =$600 gross profit per square foot.
$600 x2000(SF) = $1,200,000 annual sales.
Even the rent is slightly lower across all suburban markets. For example, the current asking rent price is $27 per square foot in Maryland, generally higher along Bethesda ($40.06) and Rock Spring ($30.34) neighborhoods. If a small company has less than $400,000-$500,000 in annual revenue, staying in a standard Class A (or even Class B) office building in a fair neighborhood is infeasible.
While many believe it is primarily employees' preference to work remotely, it is also possible that some small businesses would prefer their coworkers work remotely to meet their tight profit margins.
Others are convinced that the 2022 Inflation Reduction Act will benefit those energy-efficient buildings and retrofit properties. Plus, the aggregate deduction amount can be counted for four consecutive taxable years, including the current filing year. Still, the bill is designed for a ten-year plan; the refund will take time, which might not immediately impact those office leasing decisions.
What can we do next?
Many office buildings are designed with adaptable structure grids, which can convert to other functions. See this article focusing on building planning, its potential uses of the grids, and follow up for future discussions.
Notes and references:
All small business companies increased by 644,597 from 2021 to 2022. The number of companies with less than twenty employees increased by 638,835; the company with more than twenty employees only increased by 5,762.
For the definition of commercial building classifications, please refer to Building Class Definition by BOMA.org
See current office asking rent information, “ Coomercial Real Estate Market in Washington D.C.”, and “Commercial Real Estate and Ofiice Space market in Maryland”, via office.net
For readers who want to understand more details of the recent Inflation Reduction Act 2022, please see “A Sustainability Bill Talk”, Letters to Tiffany.
See below for the 2021 small business profile overview, show the higher share of office-oriented small businesses trend remains mostly the same from 2021 to 2022.
