Office Space Construction: Costs and Considerations
Thursday, May 10, 2007
A Member article submitted by Coalition Exchange Member Lawrence FitzGerald, Senior Vice President, Grubb & Ellis Company
tenants must deal with a myriad of factors, including location, access,
visibility, quality of the property, and costs, when choosing an office
space. For many companies, it is not unusual for office rents to be one
of the largest components of a company’s overhead (labor costs being
the other). One factor often-time overlooked is the cost and length of
time involved in a build-out or renovation of office space.
typical lease scenario a landlord provides a tenant upfront money with
which to design and construct renovations to its space. This money is
often referred to as a “tenant improvement allowance” or simply the
“allowance”. It is customary that the allowance is quoted as a dollar
per square foot figure, (i.e. $10/psf). This “allowance” will usually
vary depending on the condition of the space (shell space versus
existing offices), the length of lease term (longer terms yield higher
allowances), and the underlying credit history of the tenant.
construction costs for key building materials increasing by 25% over
the last 36 months, the allowance provided oftentimes does not cover
the entire scope of work required. This can create a situation where a
tenant must fund the shortfall, either by coming out-of-pocket with the
difference or by the landlord’s amortization of the overage into the
lease cost. Typically, the landlord or a contractor of the landlord
handles the build-out for the tenant; in this case, it is not unusual
for a tenant to request multiple bids for the work. If the landlord
does not perform the work, a tenant will typically employ its own
Further, depending on the jurisdiction in which
the building is located, the design and construction time frame may
take anywhere from three to six months after the execution of a lease.
A larger space with a more complicated design can extend the build-out
process. Many tenants, especially those in the medical profession or
government contractors with security issues, are often shocked when
learning the real costs and timeframe involved in the process.
today’s office rents continuing to creep up, the costs and time
associated with a typical build-out can make a significant impact on
tenants’ choice of space. The wise tenant plans well ahead and seeks
the guidance of experienced professionals to aid in the process.