Suites let faster and at a higher rate per square metre, but they lose area to corridors, cost money to create and re-let twice as often. Price the whole cycle before deciding.
Splitting an office floor into suites pays only if the higher rent per square metre covers the area lost to corridors, the cost of the works and the extra voids, fees and incentives of letting four times instead of once. On an illustrative 1,500 m² floor, four suites at 440 per m² are worth 5,688,707 against 6,256,094 for a single letting, 567,387 less, despite a 10 per cent rent premium. The suites need a premium of 19.1 per cent to break even.
Worked in full in Office Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Subdivision is the standard answer to a floor that will not let whole: smaller occupiers are more numerous, they pay more per square metre and they take space faster. All three claims can be true and the decision can still lose money, because the comparison that matters is not this year's rent roll but the net income of every future letting cycle.
| Input | Whole floor | Four suites |
|---|---|---|
| Net internal area of the floor, m² | 1,500 | 1,500 |
| Area lost to shared corridor and facilities | 0% | 8% |
| Lettable area, m² | 1,500 | 1,380 |
| Rent per m² a year | 400 | 440 |
| Lease length, months | 120 | 60 |
| Void before each letting, months | 12 | 6 |
| Rent-free per letting, months | 12 | 6 |
| Letting and legal fees, share of first-year rent | 15% | 15% |
| Refresh of the space at each re-letting, per m² | 0 | 50 |
| Extra irrecoverable management, per m² a year | 0 | 10 |
| Subdivision works, per m² of floor | 0 | 300 |
While the space is empty the landlord carries the service charge and empty rates, taken at 120 per m² a year on the whole floor, 180,000 a year. Cash flows are monthly and discounted at 7 per cent a year. Rent is held flat, so the comparison isolates the letting pattern rather than a growth assumption, and for simplicity the four suites are modelled as letting and expiring together.
Each option is a repeating cycle: a void, a letting with a rent-free period, then rent until the lease ends and the cycle starts again. The whole floor's cycle lasts 132 months, the suites' 66. Value one cycle, then value the infinite repetition of it, then deduct any upfront works.
Value of all cycles = PV of one cycle ÷ (1 − discount factor for one cycle length)
Value of the floor = value of all cycles − upfront works
Equivalent net rent per m² = value of the floor × 7% ÷ 1,500
With monthly net cash flows in C2:C133 and a monthly rate in B1: =NPV(B1,C2:C133)*(1+B1)/(1-(1+B1)^-132) for the whole floor, and the same with 66 months for the suites.
| Component | Whole floor | Four suites |
|---|---|---|
| Rent received | 3,542,518 | 2,207,735 |
| Void costs | -174,537 | -88,744 |
| Letting fees | -84,112 | -88,050 |
| Refresh of the space | 0 | -66,705 |
| Extra management | 0 | -56,753 |
| One cycle | 3,283,869 | 1,907,482 |
| Measure | Whole floor | Four suites |
|---|---|---|
| Headline rent a year | 600,000 | 607,200 |
| Value of all letting cycles | 6,256,094 | 6,138,707 |
| Less subdivision works | 0 | -450,000 |
| Value of the floor | 6,256,094 | 5,688,707 |
| Equivalent net rent per m² of floor | 292.0 | 265.5 |
Before the works, the suites are already 117,387 behind: the 10 per cent premium on 8 per cent less area lifts the headline by only 1.2 per cent, and twice as many lettings mean twice the fees, plus refresh and management costs a single tenant would not have generated. Both options spend the same 81.8 per cent of each cycle paying rent, because the suites' shorter voids and rent-free periods are matched by leases half as long. The 450,000 of works then takes the gap to 567,387, or 26.5 per m² a year of equivalent rent.
| Suite rent premium | 3-month void | 6-month void | 9-month void | 12-month void |
|---|---|---|---|---|
| 5%, rent 420 | -392,672 | -877,461 | -1,319,632 | -1,724,512 |
| 10%, rent 440 | -64,906 | -567,387 | -1,025,695 | -1,445,351 |
| 15%, rent 460 | 262,860 | -257,314 | -731,758 | -1,166,190 |
| 20%, rent 480 | 590,626 | 52,760 | -437,821 | -887,028 |
The break-even premium is 11.0 per cent with three-month suite voids, 19.1 per cent with six, 27.4 per cent with nine and 35.9 per cent with twelve. The suite void matters as much as the premium, because it recurs every five years rather than every ten.
The case for subdivision is strongest when the whole floor would not let in twelve months. If it takes 18, its value falls to 5,707,105, an equivalent 266.3 per m², and the suites at a 10 per cent premium are only 18,398 behind. That is the question to put to the letting agents: not what rent suites would achieve, but how long each option would really stay empty.
Comparing rent rolls. Four suites at 440 produce 607,200 a year against 600,000 for one tenant, so subdivision looks like a small gain before anything has been spent on partitions. The rent roll leaves out every cost that recurs with a letting, and the suites incur them twice as often. The same logic sits behind the gap between headline and net effective rent in what headline rent delivers a target net effective rent, and behind the capital-adjusted yield: an office is worth what it earns across its letting cycles, not in its best year.
Value each option over its full letting cycle, repeat the cycle, deduct the works and compare: here the whole floor wins by 567,387 unless the suites command more than a 19.1 per cent premium or the whole floor would stand empty for much longer. Office Real Estate is built on pricing the re-letting cycle back into office value, and the free workbooks for the book model the fit-out, void, incentive and fee lines used here.
It depends on the core and the floor plate, because a shared corridor, lobby space and sometimes extra WCs come out of the lettable area. The illustrative case assumes 8 per cent, taking 1,500 m² down to 1,380 m². That loss alone means a 10 per cent rent premium raises the floor's headline rent by only 1.2 per cent, from 600,000 to 607,200.
Enough to pay for the lost area, the works and the extra letting cycles. On the illustrative assumptions, with six-month voids between suite lettings and a twelve-month void on the whole floor, the break-even is 476.6 per m², a 19.1 per cent premium over 400. With three-month suite voids it falls to 11.0 per cent; with nine-month voids it rises to 27.4 per cent.
When large floors genuinely let slowly and small suites genuinely let fast. If the whole floor would take 18 months to let rather than 12, its value in the example falls to 5,707,105, and the suites at a 10 per cent premium are only 18,398 behind. The decision turns on the two void periods, which should come from letting evidence for the location, not from hope.
This article is one calculation from Office Real Estate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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