Monthly rent is only one component of the cost to move into a new commercial office. Tenants and landlords also need to consider the cost of making improvements to an office building and how to fund those improvements.
In this article, we’ll look at the average cost ranges to build out a commercial office, how to finance an office build-out, and some common expenses associated with building out a commercial office space for rent that are often overlooked.
Factors Affecting Build-Out Costs for an Office
The cost to build out and lease commercial office real estate can vary dramatically. That’s because most office build-outs are unique based on the needs of each individual tenant.
Main factors to consider
- Tenant needs: A law office or consulting firm may require high-end finishes and specialized spaces, such as sound-proofed conference rooms. Others may need more basic commercial real estate office spaces, such as a bullpen for a call center or data processing center.
- Property condition: Brand-new office space may require more time and money to be built out than what upgrading older office spaces would require. However, older office construction may need more upgrades to be move-in ready, depending on a tenant’s needs.
- Materials and labor: Costs for materials, supplies, and labor for commercial development vary based on region and quality of finishes. For example, building out office space in the Financial District of Manhattan is much more expensive than an office build-out in Tucson, Arizona.
Areas to discuss and negotiate
- Improvements needed for a commercial office build-out project.
- Type and quality of materials to be used for office build-out.
- The party responsible for paying for the office build-out – landlord, tenant, or both.
- Will the build-out project be completed by the landlord or tenant?
- Specific build-out improvements that will remain in the office space when the lease ends.
Hard Costs vs. Soft Costs
Office build-out costs are referred to as being either “hard” or “soft.”
Hard costs are office improvements that stay with the space after the lease expires and the tenant has left. Physical office improvements such as HVAC systems and ductwork, plumbing and electrical, and door or window changes are examples of hard costs.
Office build-out soft costs include building permits, inspection charges, and legal fees. Unlike hard costs that can significantly fluctuate from tenant to tenant, soft costs are generally more predictable because they aren’t dependent on hard physical improvements.
Typical Office Build-Out Costs Post-Pandemic
The commercial office sector is dramatically evolving post-pandemic, as companies shift to hybrid work models or even eliminate dedicated desks and workstations completely. According to Cushman & Wakefield’s Americas Fit-Out Cost Guide 2022, there are three main reasons why office build-out costs are predicted to increase in 2022 and beyond:
- Supply chain disruptions are creating increased delays, more uncertainty, and higher costs.
- As more employees return to the office, organizations will test different layout types for hybrid work, increasing the amount of build-out activity and demand for materials and labor.
- Supplier costs are expected to increase due to rising labor wages and material expenses.
As JLL’s 2022 U.S. & Canada Office Fit Out Guide reveals, construction costs for office build-outs have increased 23% so far this year, due in large part to rising hard costs and changing design standards.
After compiling data from over 2,900 office buildings in the U.S. and Canada, JLL has formed an office build-out matrix of design styles and material qualities. The firm projects that going forward, the overall construction costs of office build-outs will rise between 8% and 12%.
For high-end office build-outs, costs to outfit out an office space can average around $243 per square foot. Even companies that select a traditional office floor plan with dedicated offices and desks should expect to pay more per square foot for an office build-out:
- Office build-outs with bench-style seating and smaller collaboration and meeting room spaces can cost between $194 to $221 per square foot, and up to $257 per square foot for higher-quality custom flex spaces.
- Build-out costs for office floor plans incorporating workstations in an open setting with private offices and collaborative workspaces can range from $205 to $275 per square foot.
- Office floor plans with a higher percentage of private offices and large conference rooms can cost between $212 to $290 to build out.
Although overall office leasing activity in the U.S. is well below the 10-year average, tenant improvement costs have remained steady. The price of copper and steel pipe and tubing, for example, have both increased by double-digits over the past year alone.
Office users and landlords in New York and San Francisco can expect to pay the highest prices per square foot for moderate-style office build-outs. On the other end of the spectrum, office build-out costs are cheapest for office properties in growing South and Southeastern markets including Fort Worth and Tampa.
How to Pay for an Office Build-Out
Landlords and tenants can generally negotiate costs to build out a commercial office for lease at signing. In general, tenants with the highest credit ratings and longer lengths of time in business have more negotiating power than a small business looking for its first office space.
Some of the most common ways to pay for an office build-out are:
A tenant may receive a recent concession or tenant improvement allowance from their landlord in the form of “free rent” or rent abatement. Sometimes the rent really is free: for example, landlords may offer a discount of several months upfront or one month per year of the commercial lease. Other times, the landlord will extend the lease expiration date to recapture the rent concessions’ costs in the final years of the lease.
Standard build-out allowance
Some office building owners provide tenants with a pre-packaged set of improvements, with options that can include different types of flooring or paint colors. With this option, landlords generally oversee the work, with the tenant paying for any extra upgrades beyond the standard build-out allowance.
Owners of Class B and C office buildings often choose to offer tenants turnkey office space that has already been built out. Tenants looking for affordable office space to lease frequently don’t have the budget or business longevity to pay for building out space. In this scenario, a tenant might take possession of the space and pay for minor costs such as furniture and decor.
Items Affecting Office Build-Out Costs
Costs to build out a commercial office can vary within the same office submarket and even from one office building to another. Items that can contribute to the overall cost to build out a commercial office space include:
- General requirement
- Demo existing build-out
- Final cleaning
- Architectural woodwork
- Thermal insulation
- Metal stud framed partitions
- Acoustical ceilings
- Resilient flooring
- Fire extinguishers
- Window shades
- Fire protection
- Domestic water piping
- General conditions
- GL insurance
- GL contingency
- GC fee
The Bottom Line
Both landlords and tenants benefit by knowing what it costs to build out a commercial office. Once the cost of improving office space is understood, landlords can negotiate tenant improvement allowances, and tenants can make an apples-to-apples comparison of leasing proposals received from different office landlords.