Fit-Out Costs To Help Tenants Plan for Construction Spending

Searching for office space is a daunting task, especially for business owners that must continue to run a business as they take on the tasks of a search. Securing office space in the right location for rental rates that work with each budget is a multi-phased process that involves touring locations, negotiating with landlords, executing legal documents and much more.

One of the most challenging phases of the process involves the tenant fit-out or construction of the office suite a business plans to occupy. To help in this effort, Cushman & Wakefield's new study titled "Office Tenant Improvement Cost Guide," provides detailed construction data relating to office fit-out for 39 markets in the U.S. and Canada

Brian Ungles, who serves as Americas leader for project and development services at Cushman & Wakefield and is the lead author of the study, noted in an email to LoopNet that this is the first such guide published by the company in North America and it is slated to be updated and published annually. Asked what the motivation was behind its publication, Ungles said, "Our clients are always looking for data and insights to manage their real estate portfolios and make the best decisions possible. Construction costs are a critical component of the overall returns for investors or cost of occupancy for tenants."

Construction Data is Helpful Before You Sign a Lease

Before construction begins, prudent business owners typically collect several bids from architects, general contractors and/or project managers to select providers that best fit their needs and budget. Often, these bids are solicited after a tenant has signed a lease. But before arriving at that point, tenants in the market can benefit greatly from construction cost benchmark data to help them estimate the cost of building out space.

What most would-be tenants are not aware of is that construction costs should be incorporated into their calculations before they sign a lease with a landlord. One reason is that concessions can vary significantly from one offer to another, making it difficult to conduct an apples-to-apples comparison of top offers from landlords. Additionally, the physical condition of office spaces under consideration will differ greatly, with some needing extensive demolition and others requiring just cosmetic upgrades. The tenant improvement allowance (i.e., the amount a landlord contributes toward a tenant's fit-out costs) will vary significantly from building to building. Calculating how far each allowance will stretch is critical to assessing the overall value of each proposal.

Data Compilation

Cushman & Wakefield compiled average office fit-out costs, on a per-square-foot basis, for 39 markets in the U.S. and Canada. The company generated criteria for a typical office build-out (described below) and collected bids from construction professionals in each market. "The results were reviewed and compiled to understand variations in pricing and approach," noted the study. It went on to acknowledge that "The cost of a tenant's build-out is highly dependent upon the organization's needs, layout, furniture and finishes. [But] even with those variances, it can be helpful to have a cost benchmark for planning and budgeting."

The study provides data for five broad construction categories but also for roughly 20 distinct trade-related and project management tasks. Major categories include carpentry and walls; floors and finishes; general conditions; mechanical, electrical and plumbing (MEP); and miscellaneous construction. Costs for more nuanced construction tasks are provided for most, though not all the markets, and they include demolition, cleaning, woodwork, insulation, fire protection, framing, tile work, ceilings, flooring, painting, electrical, appliances, HVAC, plumbing, insurance, contingencies and various types of fees.

Build-Out and Cost Parameters

To gather data that was consistent across markets, Cushman provided a series of parameters when soliciting data from contractors.

• Size and Uses. Assume a 20,000 to 25,000 rentable square foot fit-out with 20% offices and two pantries.
• Finishes. Plan for mid-grade finishes in employee areas and slightly upgraded finishes in client-facing areas.
• Technology. Include single [network cable] drops to each workstation with video conference capability in the conference rooms.
• Furniture. Cost out mid-range workstations and case goods (e.g., furniture made of hard materials such as wood or plastic) from standard mass manufacturers.

"The enclosed cost data is representative of hard costs [i.e., construction costs] only and does not reflect the total project costs. Soft costs, furniture, fixtures and equipment, and other costs should be additive to the cost data included," noted the study.

Costs are separated into categories for first- and second-generation space. The former is office space that has never been built out. First generation space is also said to be in "shell" condition, meaning there are no finishes, so floor slabs, columns, wiring, etc., are all exposed. The latter is office space that was previously occupied, so typically, there are finishes in the space such as ceiling tiles, drywall, partitions, flooring, lights and window blinds.

As part of the study, Cushman & Wakefield created an interactive map of the U.S. and Canada. It enables users to click on any of the 39 markets profiled in the study and see a snapshot of the data in each of the five construction categories.

Select Construction and Market Data

The study also compared data from market to market and some of that information is listed below.

• "Across 39 U.S. and Canadian markets, the total cost of a first generation build-out varies from a low of $70 per square foot in Baltimore to over $200 per square foot in New York and San Francisco."
• "Second generation costs are lower, and the gap [between markets is] not as extreme. The range goes from $47 per square foot in Baltimore to $165 per square foot in San Jose, California (Silicon Valley)."
• "Costs are highest across primary U.S. gateway office markets with first generation costs averaging nearly $150 per square foot and second generation at an average of $112 per square foot ."
• "On a typical project, the largest category of expense is related to mechanical, electrical and plumbing (i.e., MEP systems), which usually accounts for 40% to 45% of the project cost on a first generation build-out," the study found.
• Markets with the largest declines in their office construction pipelines throughout 2020, measured as a percentage of the market's total inventory, include: Miami (-2.82%); Salt Lake City (-2.68%); Nashville, Tennessee (-1.90%); Minneapolis/St. Paul (-1.87%) and Charlotte, North Carolina (-1.79%).
• Markets where the office construction pipeline increased throughout 2020, measured as a percentage of the market's total inventory, include: Raleigh/Durham, North Carolina (4.09%); San Diego (2.23%); Boston (1.86%); Phoenix (0.99%) and Upstate New York (0.85%).

This article was updated on 12/12/2024