Fit-Out Prices To Assist Renters Prepare for Construction Costs
It can be daunting to search for office space, especially for business owners who must still run their business while they do the job. It takes a lot of work to secure office space in the best location at affordable rental rates. This includes touring potential locations, meeting with landlords, and executing legal documents.
The tenant fit-out, or construction of an office suite that a business wants to occupy, is one of the most difficult phases. Cushman & Wakefield's "Office Tenant Improvement Price Guide" study provides details on office fit-out in 39 U.S. markets and Canada.
Clients seek data and insight to help manage their real estate portfolios and make the best decisions. The construction costs of tenants and investors are critical components of overall returns.
It Is Important To Have The Right Information Before You Sign A Lease
To ensure that they are able to choose the best provider for their needs and budget, business owners should solicit bids from general contractors, architects, and/or project managers before construction can begin. These bids are often solicited once a tenant has signed their lease. However, tenants need to have access to construction cost benchmark data before they can arrive at this point. This will allow them to estimate the cost of building space.
Most tenants don't realize that landlords should include construction costs in their calculations before signing a lease. It is difficult to compare apples to apple top offers from landlords because concessions can differ from one offer to the next. The physical condition of the office space under consideration will vary greatly. Some may need extensive demolition, while others only require cosmetic upgrades. The amount that a landlord contributes to a tenant's fitting-out costs will vary from one building to the next. It is crucial to calculate how much each allowance will stretch to assess each proposal's overall value.
Data Compilation
Cushman & Wakefield calculated average office fit-out prices per square foot for 39 markets in the U.S., Canada. Cushman & Wakefield created a standard office build-out and received bids from local construction professionals. The study noted that the results were reviewed and compiled to identify pricing and approaches variations. The study also noted that a tenant's build-out cost depends on their needs, layout, and finishes. Even with these variances, it is helpful to have a cost baseline for budgeting and planning.
The study includes data for five major construction categories and approximately 20 different trade-related and project management tasks. The major categories are carpentry and walls, floors and finishes, general conditions, mechanical and electrical plumbing (MEP), and miscellaneous construction. The costs for more complex construction tasks include cleaning, demolition, insulation, fire protection, and framing. They also include painting, electrical, plumbing, insurance, contingencies, and other fees.
Parameters For Cost And Build-Out
Cushman used a set of parameters to solicit data from contractors to collect consistent data across all markets.
Size and uses. Imagine a fit-out of 20,000-25,000 square feet with two pantries and 20% offices.
Finishes. Finishes.
Technology. Each workstation should have a single [network cable] drop.
Furniture. You can find mid-range workstations from standard mass producers and case goods, such as furniture made of wood or plastic.
The enclosed cost data does not include the total project cost. It is only representative of hard costs (i.e., construction costs). The study noted that soft costs such as furniture, fixtures, and equipment should be added to the cost data.
The costs for space of the first and second generation are divided into two categories. First, first-generation office space is not yet built out. The first generation space is considered to be a "shell," meaning that there are no finishes. This means that floor slabs, columns, and wiring are all exposed. This is an office space that has been occupied previously. Typically, finishes such as ceiling tiles and drywall, partitions or flooring, lighting, blinds, and lights are found in this space.
Cushman & Wakefield developed an interactive map of Canada and the U.S. as part of the study. You can click on any one of the 39 countries in the study to see a snapshot from each of the five categories of construction data.
Select Construction and Market Data
Some of the information in the study was also compared from market to market.
"Across 39 U.S. markets, the total price of a first-generation build-out ranges from $70 per sq foot in Baltimore to more than $200 per square feet in New York and San Francisco."
"Second-generation costs tend to be lower, and the gap between markets is not as wide. This ranges from $47 per sq. ft. in Baltimore to $165/square foot in San Jose (Silicon Valley), California.
"Costs are high in primary U.S. gateway offices markets, with first-generation costs on average at nearly $150 per sq foot and second-generation costs on an average of $112/square foot."
The study revealed that the most expensive category on a typical project is mechanical, electrical, and plumbing. This usually accounts for 40 to 45% of the total project cost on a first-generation build-out.
The markets with the greatest declines in office construction pipelines through 2020, as a percentage market's total inventory, is measured, are Miami (-2.2%); Salt Lake City (2.68%); Nashville, Tennessee (-1.90%), and Minneapolis/St. Paul (-1.87%), Charlotte, North Carolina (-1.79%)
The markets where office construction pipelines increased in 2020 are Raleigh/Durham (4.09%), San Diego (2.23%), Boston (1.86%), Phoenix (0.99%), and Upstate New York (0.85%).
