TI Construction Costs: The Real Numbers

I recently saw a post on LinkedIn claiming that Tenant Improvement (TI) construction costs are between $150/sf and $230/sf. That’s an $80/sf spread—a huge range! How are is anyone supposed to know if a lease deal makes sense with that kind of spread?

In the last 4 months, several landlords have asked me about current construction costs, with many hearing $150/sf as the minimum. I found it hard to believe, so I pulled data from BEECHER’s recent projects. Not one project hit $230/sf. The average cost of the 8 projects I examined was $88.38/sf; if you throw out the high and the low, it dropped to $80.96/sf. These figures include design and PM fees, not just construction costs.

Where’s the Disconnect?

1. Deals are Tough, Stop Hitting the Easy Button: It takes more effort, creativity, and time to make a project work today.
2. Your Project is Unique, The Specifics Matter: Each project is unique, it’s unrealistic to apply rough estimates and expect to have results that can be relied upon.
3. Perspective Matters, Are You a Tenant or a Landlord: Tenant and Landlord perspectives on the lease financials are just different.

Stop Hitting the Easy Button!

Post-COVID, many realized they could work efficiently without being in the office. However, we’ve spent the last 3.5 years tripping over profitability due to historically low interest rates. Now, the easy deals are gone. The cost of capital is too high to make deals pencil out as they did a few years ago. You need a creative, hardworking team to find savings and drive value.

Overcoming the Easy Button:

1. Embrace Complexity: Easy Button solutions won’t cut it anymore. Complex projects require deeper analysis, innovative thinking, and a willingness to explore unconventional approaches.
2. Build a Committed Team: Assemble a team that’s ready to roll up their sleeves and tackle challenges head-on. Look for partners who are not just experienced, but also passionate about finding innovative solutions. A team that’s curious and willing put in the extra effort will make a significant difference.
3. Invest in Relationships: Strong relationships with contractors, suppliers, and other stakeholders are invaluable. Building trust and maintaining open communication channels can lead to better collaboration and more favorable terms. Remember, the strength of your network can directly impact the success of your project.

If you ask me, “What do you think XYZ project will cost right now?” I’m not going to give you an answer because I need time, and a like-minded team, to dig into that XYZ project, find the risks, find the opportunities, and get creative to find the savings. As an industry we need to stop relying on easy solutions. The current market demands more diligence, creativity, and effort to ensure our projects are successful.

Project Specifics Matter

Every project is unique. You can’t use “Rules of Thumb” in today’s market.

Key Considerations

1. Type of Space:
   • First-Gen Space vs Modifying Existing Spaces: Building first gen space versus building from a white box (an empty shell) or a spec suite (partially finished) can vary costs greatly based on the level of customization needed.
2. Project Size:
   • Small vs. Large Scale: The cost per square foot can differ based on the overall size of the project. Larger projects might benefit from economies of scale, while smaller projects may have higher costs due to fixed expenses spread over fewer square feet.
3. Office Layout:
   • Private Office Heavy: More walls, doors, and individual office setups can drive up costs.
   • Open Office Plans: Generally, open spaces can be less expensive to build out, but they might require higher-quality finishes and design elements to create an appealing environment.
4. Quality of Finishes:
   • Standard vs. High-End: The choice between standard, mid-range, and high-end finishes can make a substantial difference in your budget. High-end finishes add to the aesthetic appeal but can also significantly increase costs.
5. Technical Requirements:
   • Specialized Needs: Some projects may require specialized technical infrastructure, like advanced HVAC systems, data cabling, or specific lighting setups. Not every project requires the specialized systems, so their $/sf shouldn’t be lumped in with those projects that do.

Understanding and planning for these specifics ensures you get accurate cost estimates and avoid unexpected expenses. Each element, from the type of space to the technical requirements, plays a crucial role in defining the final budget and timeline.

Perspective: Tenant vs. Landlord

Tenant and landlord perspectives on the deal can differ significantly. Understanding these viewpoints is crucial for successful negotiations and project completion.

Tenant Perspective:

1. Maximizing Value:
   • High Expectations: Tenants often seek the best possible value for their money. They want high-quality finishes, state-of-the-art amenities, and a space that reflects their brand identity.
   • Negotiation Leverage: Tenant brokers may use high construction cost estimates as leverage to negotiate better terms and allowances from landlords. For instance, citing a $150/sf minimum cost can strengthen their position in securing more favorable lease terms.
2. Budget Constraints:
   • Cost Sensitivity: Tenants are typically working within strict budgets and must balance the need for a quality workspace with financial limitations. They need accurate cost estimates to plan effectively.
3. Operational Efficiency:
   • Minimal Disruption: Tenants prioritize projects that can be completed quickly and efficiently to minimize disruption to their operations. They are concerned with both the cost and the timeline of construction.
   • Long-Term Impact: Tenants also consider the long-term operational costs of the space, such as energy efficiency, maintenance, and adaptability for future needs.

Landlord Perspective:

1. Asset Value:
   • Protecting Investments: Landlords are focused on protecting and enhancing the value of their property. They want improvements that increase the asset’s marketability and long-term worth.
   • Cost Control: Landlords are cautious about incurring high upfront costs that may not yield proportional returns. They seek cost-effective solutions that enhance the property without overextending financially.
2. Lease Negotiations:
   • Balancing Costs and Incentives: Landlords must balance offering competitive tenant improvement allowances to attract tenants while ensuring these costs are recoverable through the lease terms.
   • Risk Management: Landlords aim to mitigate risks associated with high TI costs, such as long payback periods. They need to ensure that investments in TI lead to lease renewals and stable occupancy.

Bridging the Gap

Understanding these differing perspectives is key to successful negotiations and project planning:

1. Collaborative Approach: Both parties should work together to find common ground. Open communication and transparency about goals, constraints, and expectations can help in reaching mutually beneficial agreements.
2. Accurate Cost Estimates: Providing realistic and detailed cost estimates helps both tenants and landlords make informed decisions. Avoiding broad or inflated estimates ensures that projects are feasible and budgets are met.
3. Flexibility and Creativity: Both sides need to be flexible and creative in finding solutions. Whether it’s through phased improvements, alternative materials, or innovative design, there are ways to meet both tenant needs and landlord constraints.
4. Focus on Long-Term Value: Emphasize the long-term benefits of the improvements. High-quality, well-planned tenant improvements can lead to higher tenant satisfaction, longer leases, and increased property value.

Opportunities in the Market

Despite the challenges, there are significant opportunities to find competitive lease rates and construction costs if you know where to look and how to approach your projects.

1. Increased Availability of Contractors:
   • Eager GCs: Contrary to the notion that contractors are too busy, we’ve seen a high level of interest from general contractors (GCs) looking to secure work. For example, in a recent bid for a 35,000sf TI project, all the GCs we approached responded, highlighting the current availability and eagerness to take on new projects.
   • Competitive Bidding: This increased availability can lead to more competitive bidding, potentially driving down costs as GCs strive to secure projects.
2. Securing Future Work:
   • Forward Planning: GCs are looking to fill their pipelines for the next few quarters. Securing a project that is certain to move forward is highly valuable in the construction community, especially when many projects are being shelved or delayed.
   • Certainty is Key: Demonstrating that your project is well-defined and ready to proceed can attract more competitive bids and better terms from contractors and suppliers.
3. Leveraging Relationships:
   • Strong Partnerships: Maintaining and leveraging strong relationships with contractors and suppliers can lead to better pricing and terms. Trust and mutual respect play a significant role in negotiating favorable deals.
   • Collaborative Approach: A collaborative approach with your team and partners can uncover cost-saving opportunities and innovative solutions that may not be apparent in a more adversarial or transactional relationship.

Steps to Capitalize on Opportunities

1. Detailed Planning: Invest time in thorough planning and detailed project scoping. Clear, comprehensive plans reduce uncertainties and help secure more accurate and competitive bids.
2. Engage Early with Contractors: Early engagement with contractors and suppliers allows for better collaboration and alignment on project goals, timelines, and budgets.
3. Transparent Communication: Maintain open and transparent communication with all stakeholders. Clear expectations and regular updates can prevent misunderstandings and ensure everyone is working towards the same objectives.
4. Be Ready to Adapt: Stay flexible and open to adjusting your plans based on new information and opportunities. The ability to pivot and adapt can lead to significant cost savings and project enhancements.

By understanding these market dynamics and leveraging available opportunities, you can navigate the current landscape effectively and achieve the best possible outcomes for your projects.