Are Favorable Conditions for Tenants Enough to Offset Rising Construction Costs?
Tenant improvement (TI) allowances are a longstanding landlord staple and, in the past, could go a long way toward easing the cost of a relocation. Today, TI allowances are more generous than ever — but they’re not keeping up with the high costs of construction, according to JLL’s U.S. and Canada Fit Out Guide. However, savvy tenants can find new ways to stretch their build-out dollars.
TI allowances have jumped by double digits in recent years, growing more than 10% in 2017 and 13% last year, according to JLL’s Fit Out Guide. While double-digit TI allowances may sound generous, the amounts are barely keeping up with construction cost growth; the average cost of an office fit-out increased by 12% in 2018 alone. While about 60% of construction cost increases in 2018 were offset by increases in TI allowances, the remaining 40% of the costs were passed on to tenants.
Choosing the right office style means real bottom-line impact
When planning a new office fit-out, considering style and density is the first step toward determining the cost. JLL research has benchmarked three primary styles that occupiers have been choosing in recent years, each reflecting distinct organizational work styles.
1. Progressive office style: $170 per-square-foot average build-out. According to a recent proprietary JLL survey of U.S. corporate occupiers, 28% have progressive-style office space. Progressive style is an open-office floor plan with bench-style furniture, multiuse spaces and common areas, a design aimed at enabling higher employee collaboration and space efficiency. With minimal dividing walls, the progressive style is light on hard costs, but has above-average technology costs due to requirements for collaborative, multiuse and common areas.
2. Moderate office style: $182 per-square-foot average cost to build. By far the most common office design is the moderate style, used by 52% of corporate occupiers. In moderate office styles, 10% of space is given to enclosed offices and the remaining 90% has an open floor plan, balancing options for privacy and collaboration. Project budgets tend to have middle-of-the-road hard costs, given the moderate use of dividing walls and enclosed private offices.
3. Traditional office style: $196 per-square-foot average cost to build. Today, 21% of offices fall squarely in the traditional style, in which 30% of floor space is dedicated to enclosed offices and the remaining 70% given to an open floor plan with relatively large workspaces and high partitions. Compared to other styles, traditional office designs have the lowest employee density and tend to have the highest hard costs-per-square-foot.
Designing for the future means designing for adaptability
Taking a long-term view, the best thing tenants can do is plan for adaptability. A goal of every new fit-out should be the ability to change and upgrade the workplace for years to come. In doing so, a space can better meet employee expectations, as well as the physical and financial needs of an organization, over the long term.
For tenants focused on efficiency, adaptability trumps density. Efficiency means not only optimizing the layout of the space, but also selecting the right office style and finish level to support and improve an organization for years to come.
JLL research indicates that TI allowances will keep pushing higher in 2019 — and that’s good news for tenants. This year will be the fourth in a row with more than 50 million square feet of new office space coming online, suggesting that concessions will continue to increase in most markets.
The cost of construction continues to rise, and while materials costs are expected to be stable, a shortage of qualified construction labor will be among the most significant hurdles in the way of completing projects on time and on budget in 2019. With costs rising so quickly, it is more important than ever for tenants to be knowledgeable and to focus on creating the most effective space to meet their needs.
Todd Burns is President of JLL’s Project and Development Services for the Americas region. At JLL, Burns’ responsibilities include mobilizing a global team of 6,000 project managers to deliver around $30 billion worth of construction projects annually—nearly 50,000 projects each year. He draws on his training as an architect and previous experience working as a contractor and owner’s representative to provide the firm’s clients with project management solutions.