10 Key Steps for Successfully Renovating a Warehouse into a Modern, High-Performance Space

Relocating from one warehouse to another involves more than just moving stock and equipment. Unlike standard offices, warehouses and distribution centers are often customized for specific users. This makes the relocation process challenging, like fitting a square peg into a round hole. However, with the right preparation and strategy, you can adapt your new facility to enhance your operations.

Before renovating your warehouse into an office space, it's crucial to verify that the zoning regulations allow for such a change. Zoning laws dictate how properties in specific areas can be used and may have restrictions on converting industrial spaces into commercial office spaces.

Transforming an older industrial site into a modern, high-performance workplace can be complex but rewarding. Here are key steps to follow when renovating a warehouse:

1. Know your landlord.
2. Create a space plan.
3. Evaluate foot traffic and layout.
4. Develop a budget.
5. Solicit contractor bids.
6. Apply your tenant improvement allowance.
7. Understand tenant improvement amortization.
8. Review your work letter.
9. Obtain permits.
10. Manage cost overruns.

1. Know Your Landlord

Commercial real estate owners fall into two main categories: private owners and institutional landlords. Institutional landlords include REITs, equity funds, and other large entities. Private owners range from high-net-worth individuals to multi-generational family offices.

In recent years, institutional entities have become more interested in the industrial sector. However, many industrial properties are still owned by private investors. These private owners often provide little to no funds for tenant improvements, focusing on minimizing outgoing cash flow. They may be open to negotiation and creative solutions.

Institutional landlords, on the other hand, usually have set budgets for tenant improvement allowances and are less flexible in negotiations.

Understanding your property owner is crucial. Adjust your expectations and tactics accordingly. Before negotiating a tenant improvement allowance, you need to develop a budget and create a space plan.

2. Create a Space Plan

Industrial tenants often design spaces that exceed their budget. Carefully refining your space plan is crucial, and hiring an architect usually provides a high return on investment.

An architect helps align your space with your operational and financial needs. Sometimes, the landlord covers the architect's fees to secure a lease, while other times, the tenant pays. It's important to clearly define who is responsible for these costs before engaging an architect.

After assessing your needs and designing a responsive facility, the architect will collaborate with your contractor. This process, called "value engineering," aims to achieve your facility goals within your budget.

3. Evaluate Foot Traffic and Layout

Optimizing your warehouse layout is crucial when renovating it into a functional workspace, such as an office. Assessing and improving the layout ensures better traffic flow and safety, which are vital for an efficient working environment.

Here are key steps to optimize your warehouse layout for office conversion:

• Assess Current Layout: Identify areas where congestion occurs and where accidents or near-misses are common. Evaluate if aisles are too narrow or if loading and unloading docks need reconfiguration for the new office use.
• Plan Traffic Flow: Design wide, unobstructed pathways to facilitate easy movement of employees and equipment. Ensure that high-traffic areas, such as entrances and common areas, have clear and direct access to workstations and meeting rooms.
• Safety Considerations: Implement safety measures such as marked walkways, proper signage, and barriers to separate pedestrian and vehicle traffic. Ensure that emergency exits are easily accessible and well-marked. Consider the needs for accessibility and ADA compliance in the new office layout.
• Efficient Layout: Position frequently used areas, such as break rooms and meeting spaces, closer to central locations to reduce travel time. Use space-saving storage solutions and modular furniture to maximize floor space and adaptability.
• Regular Reviews: Periodically review and adjust the layout based on feedback from employees and changes in operations. This ensures that the layout remains efficient, safe, and conducive to productivity over time.

4. Develop a Budget

The budget, or pricing plan, is the roadmap the architect creates for the general contractor. This plan outlines parts of the facility to be demolished, as well as the size, shape, finishes, materials, and quantities needed for the renovation. The architect provides options for upgrades and alternatives, which the contractor bids on as separate line items. You and the architect then mix and match alternatives to find the right balance of form, function, and budget.

Remember, the landlord might plan to renovate the space to meet code, modernize systems, or remove old improvements. Be clear on these landlord-led improvements, as their costs should not be deducted from your tenant improvement allowance.

5. Solicit Contractor Bids

Once the pricing plan is complete, arrange site tours (job walks) and solicit bids from three general contractors. Competing bids help achieve optimal pricing, but avoid engaging more than three contractors to prevent issues among bidders.

The job walk allows prospective contractors to tour the space with the architect, tenant, landlord, and project or construction manager, comparing the space to the pricing plan.

Review each bid carefully, paying attention to any outlier expenses. If a line item is significantly higher than others, investigate why. Create a list of questions for each contractor to understand their bidding process.

6. Apply Your Tenant Improvement Allowance

Once your new landlord has priced your proposed tenant improvements, they will inform you of the tenant improvement allowance. How these funds are allocated depends on your preferences and who manages the construction project.

If the landlord manages the build-out, they select the contractor and project manager, paying for the construction directly. This approach reduces your time and effort and might offer preferred pricing due to the landlord's experience. However, the landlord will likely charge a fee, reducing your tenant improvement allowance.

Alternatively, you can manage the project yourself. In this case, you hire and pay the contractor directly, with the landlord providing your tenant improvement allowance as free rent.

A third option balances the two approaches. You manage the project and hire your contractor, but the landlord compensates the providers directly. The contractor typically collects progress payments, with a final payment after all lien releases are received.

Each method has its pros and cons. Work with your broker and real estate team to decide which is best for your situation.

7. Understand Tenant Improvement Amortization

A tenant improvement allowance is like a loan, not a gift. If the landlord funds your space build-out, they expect repayment over time, usually with interest. This process is called amortization. Typically, the payback period matches the lease length, though longer leases might have shorter payback periods.

Interest rates for tenant improvement allowances vary. Some small landlords don't charge interest, focusing on recouping their investment. Most landlords use standard lending benchmarks for interest rates. It's essential to verify these benchmarks to ensure they are appropriate for your situation.

8. Review Your Work Letter

The work letter outlines the tenant's and landlord's construction responsibilities. Negotiating suitable terms in the work letter protects both parties.

If the landlord manages construction, the work letter includes a target completion date. Delays could result in penalties unless they are beyond the landlord's control, like weather or government shutdowns.

A common approach is to have the lease start when construction is substantially complete. This prevents you from paying rent for both the new and old locations simultaneously.

A "last resort clause" is usually included, setting a drop-dead date 45 to 60 days from the estimated completion date. If this date is missed, you can terminate the lease, which is not ideal for either party.

9. Obtain Permits

The city (or other local municipality) usually has 30 days from the receipt of a construction application to verify that all of the appropriate documents were received. If there are missing documents or additional information is needed, the city will notify you, wait for your response and then start the 30-day period over again.

Most city planners and building department officials are accessible in person at city hall. It is recommended that you send someone from your team to talk to city planners and building officials early in the process to ensure that everything is in order.

An experienced architect can be a valuable resource when working with the city, as they might have advantageous relationships with people in the zoning, planning and building departments who can expedite your efforts. For larger projects, it is advisable to hire an expeditor to help manage this facet of the process.

10. Manage Cost Overruns

Construction projects frequently have unexpected costs, so you will want to think through how to deal with those expenses in advance. Contrary to popular belief, cost overruns are not usually the result of a greedy and aggressive contractor who loves change orders. They typically occur because of changes made by the tenant during construction process or due to unforeseen conditions at the property.

In general, you are responsible for the majority of cost overruns. When they become apparent, a savvy landlord will require you to contribute your share of the overage first. This ensures that the landlord won't end up with an unfinished construction site in the event you unexpectedly cannot pay your portion of the additional construction costs.

Put it Into Action

If you're excited to get started on your warehouse renovation project and need to purchase a warehouse for this endeavor, browse our available industrial and warehouse properties for sale.

This article was updated on 7/17/2024