This Space Costs Whaaaat!?

Recently, there’s been a lot of discussion in the commercial real estate industry as to why tenant improvements in low- and mid-rise office buildings cost so much.

by Brian Brady

Recently, there’s been a lot of discussion in the commercial real estate industry as to why tenant improvements in low- and mid-rise office buildings cost so much. After all, creative office spaces are characterized by open space, open ceilings, and raw concrete finishes on the floors, etc. So if you’re not putting in a ceiling or finishes on the floor, where are all of these costs coming from?

Well, contrary to what you might believe, putting in conduit in the ceiling and polishing concrete to a desirable level is extremely labor intensive and more expensive than it appears.. But why? In this blog post, we will explore why what seems like a simple remodel ends up being more expensive than you may think.
 

What are Tenant Improvements?

First, let’s discuss what tenant improvements even are. In essence, tenant improvement costs are costs incurred from changes to the interior of a commercial or industrial property in order to accommodate the needs of a specific tenant. Tenant improvements, or TIs, include: the constructing of offices, conference rooms, kitchens and break areas, partitions, ceilings, floor and wall coverings, as well as mechanical, electrical and plumbing distribution, etc.
 

Tenant Improvements that Can Increase Costs

From floor finishes to HVAC distribution, tenant improvement costs are going up across the board. However, there are a few specific tenant improvements in creative office spaces in particular that tend to increase overall costs. These include:
 

High, Exposed Ceilings

One of the defining qualities of creative office spaces is high, exposed ceilings. This means that the pipes, beams, and ductwork, which are generally hidden, are actually left exposed in order to add architectural interest to the workspace.

It may seem like keeping these structural elements exposed, rather than covering them up, would save you money in the long run. However, in order to achieve that edgy, decorative look you want, it is important that implementation is done correctly – which can end up being quite labor intensive and expensive. Otherwise, your space may end up looking unfinished, rather than strategically designed.
 

Flooring

Creative office environments sometimes incorporate alternative flooring solutions such as exposed concrete. Many people often assume that sticking with concrete, rather than investing in carpet, is the cheaper route to go, when in fact, polishing concrete to a desirable level is oftentimes more expensive on a cost-per-square-foot basis than carpeting.

Why? Because exposing concrete is more labor intensive to grind, polish and seal to the desired finish – whereas carpet is simply put down with minimal preparation. . As a result, the price tends to rise significantly.
 

Operable Elements

Operable elements, or indoor/outdoor elements, are extremely popular in creative office spaces. Oftentimes, having operable elements in your creative office space is the difference between a successful creative space and an unsuccessful creative space.

However, they do come with costs. Whether it be garage doors that open up an office space to create an indoor/outdoor workspace or a central courtyard complete with conference tables and a barbecue, operable elements can drive costs in a big way.
 

Factors that Affect the Cost of Tenant Improvements

Tenant improvement costs can be influenced by a variety of factors. However, there are three defining elements that can result in unforeseen complications. These include:
 

Economies of Scale

If there is one message that we get across in this post it is this: all spaces aren’t created equal. From size to location to current infrastructure, commercial properties vary drastically from one to the next. However, when it comes to tenant improvement costs, there is one factor that plays a significant role: size.

Tenant improvement costs fluctuate depending on the square footage of the office space; and unfortunately, the cost fluctuation does not bode well for smaller spaces. For our purposes, let’s say that we have a 2,000 square-foot office space that we want to build out a with a kitchenette, private offices, a conference room as well as the necessary electrical and mechanical distribution.

The cost of building out these features in our 2,000 square-foot office space is going to cost roughly the same amount as it would in a 15,000 square foot space. As a result, these costs are going to be much more impactful (in a negative way) on the smaller space than on the larger space.

We know what you’re thinking: is there a sweet spot? Through our experience, we’ve noticed that when an office space approaches roughly 7,500 to 8,000 square feet, costs start to normalize.
 

Finding the Right Subcontractor

Finding the right contractor to execute on those tenant improvements can be tricky. After all, you don’t necessarily want a large scale general contractor who focuses on ground-up development to build out a 2,000 square-foot space. It’s just not cost-effective.

On the other hand, a small, nimble contractor may not be the right person to build your downtown high rise. Every contractor has their sweet spot and the closer you are to their sweet spot, the better off you’ll be in terms of pricing and agility.
 

Supply & Demand

Supply and demand of subcontractors in the industry also has an effect on the cost of tenant improvements in your creative office space. As more tenants are active in the marketplace and the contracting community gets busier and busier, costs are going to naturally go up due to supply and demand.
 

Final Thoughts

A lot of tenants are shocked when they hear how much it costs to make their desired improvements in their office space. However, understanding how much a project is realistically going to cost from the get-go can save you from having to raise sufficient funds later on or compromise any key elements of your project

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