Leasing office space that requires an extensive build-out can be very intimidating, but it is sometimes necessary to have the right space for your business. A commercial office space may be delivered in many ways; such as shell condition, whitebox, or 2nd generation with an existing build out present. There are two common ways that build out costs for commercial office space are funded, either Turnkey or Tenant Improvement Allowance.
Turnkey vs. Tenant Improvement Allowance
Turnkey office build-outs are completed entirely by the landlord and at their sole expense. They are based on specifications agreed to with the tenant. The scope of the build out is negotiated and detailed in the lease contract.
In a turnkey buildout, things like walls, lighting, phone jacks, electrical outlets, closets, and certain other requests are addressed. It is much easier for the tenant to have a turnkey build out since they do not have to deal with the full scope of handling the construction. However, there are certain drawbacks with turnkey build-outs. As the landlord is funding it, they are motivated to get it done cheaply. They may select inexpensive and lower quality materials. The landlord may choose a cheap contractor which could result in subpar work. However, turnkey build-outs can be a good option for companies leasing smaller space or those seeking a shorter-term lease as they may allow for a faster leasing process. With a turnkey build out, you can expect a space to be delivered with the “building standard” finishes and it will be move-in ready. The suite may lack some of the high-end aesthetic items like glass walls and marble accents though.
Commercial space build-outs can also be handled by the tenant using a tenant improvement allowance, which is commonly referred to as TI for short. The TI allowance would be negotiated in the lease and any costs beyond the landlord provided allowance would be the responsibility of the tenant to cover.
The main benefit of having a TI allowance is the tenant can be more involved with selecting the finishes, contractors, subcontractors, and perhaps get a better overall value for the total construction costs. This puts a lot of the planning work on the tenant and their team though, so this responsibility is not ideal for everyone.
When it is time to negotiate your commercial office lease, it is best to get a preliminary construction bid to determine how much of a tenant improvement allowance is needed. This will also help the landlord determine if they can do the build out turnkey instead.
Breakdown of the Common Build Out Costs for Commercial Office Space
The construction “hard costs” of the commercial build out process typically make up 75-85% of your total budget. The “soft costs” account for another 8-12%, and the various “vendor costs” are another 5-10%. It is also good practice to have a contingency allowance of around 5-10% as well. Finally, if you hire a project manager that will be an additional 3-5% fee to your total cost.
Hard costs are the general things you think about when you make the space plans. These include items like walls and framing, doors and windows, electrical, and plumbing. You may also need new paint and carpet. Don’t forget that the building’s air conditioning system may need an upgrade as well. These hard costs can vary greatly depending on the types of finishes you choose. For example, an established legal practice with many private offices will need much higher end finishes than a startup IT company with cubicles. Your business may demand a certain type of look for the space and you must budget accordingly.
Soft costs are the other expenses and services that are necessary for your construction project to get done. These typically include architectural design, permitting, engineering, and legal fees. Vendor costs are your other miscellaneous expenses. Consider things like cabling, moving, security, and signage for these.
Your contingency allowance is for unforeseen problems that will inevitably arise. Also a project manager may seem like an extra expense, but an experienced project manager can help you save a lot of money and headaches in the long run.
The cost to bring a space from shell to whitebox varies from market to market, but as a rough average it can be expected to cost somewhere around $40/SF plus or minus $5/SF or so. To get a space from whitebox to move-in ready then varies greatly depending on the layout and finishes. But at a minimum, it will likely cost $15 to $20 per square foot extra to make a space move-in ready. However, many high end office spaces can have a construction cost of around $100/SF in total.
As you can tell, there is a lot to keep in mind when calculating the build out costs for commercial office space. To make the construction process easier, it is best to start collecting bids early, have a team of experts to help you out, and don’t be afraid to pass on the space if the build-out costs prove to be too expensive.