In recent studies, statistics show that not all types of construction cost the same per square foot – and even more importantly, the price of construction per square foot varies a great deal depending upon location across the United States. In fact, location alone can represent as much as 70% of the cost driver for a single-story office building, with the median for this type of construction ranging between $160 and $170 per square foot. Keeping these figures in mind, it’s no surprise that New York tops the charts for the most expensive city to build in for all of these building types.
Because the age-old question “How much does office building construction cost?” is not one that can be easily answered, it remains a topic of debate for many to this day. Due to the wide variation in costs across different markets, there is no simple one-size-fits-all answer.
For example, new structures in shell condition will be much more expensive than second-generation buildings, whereas items such as doors, certain material finishes, ceilings, etc. can be repurposed for a build-out. In this article, we’ll explore cost-influencing factors that can affect the prices of commercial building construction across the U.S.
As we’ve touched upon, the cost of commercial construction projects fluctuates a great deal depending on a variety of factors, including many pertinent variables such as:
Below is a chart with rough estimates of the cost of various commercial construction projects in the Midwest. However, it is important to note that this information isn’t attempting to account for the many factors that can cause such fluctuation, but to simply provide a general reference point with regard to the cost of different types of commercial buildings:
As rates vary by region, you must specify this information before determining the costs of anything. In order to get a true determination of the cost of build-out, you need to specify not only the square footage, but the height of the building, as well as the materials used in construction. Many experts use reference guides such as Spon’s Architect’s and Builder’s Price Book (by year) for typical construction costs.
In addition to the type of building in question, there are several other key geographical factors to take into consideration when determining commercial construction costs. One of the most important factors is zoning – depending on what the land is zoned for will determine the cost of each of the various permits you’ll need in order to begin construction. Zoning will also determine, at least in part, what type of materials will be required for the build.
More specifically, the geographical location and its topography also play a significant role in construction costs. For example, in earthquake-prone zones such as California, seismic zoning will directly affect the cost of materials, supplies, and labor, since the code requirements for concrete, for example, are much more stringent than other areas across the United States.
Other geographical factors to be considered are hillside ordinances (if applicable) and proximity to the ocean (if applicable); these two variables are also a part of the geotechnical factor.
Furthermore, soil types are a big part of what site prep work may need to be done in order for building to commence – for example, building a foundation on land that has a high acidity (pH level) versus building in an area where the soil is clay-rich (or in a very sandy or damp area) will directly impact the type of materials used, and consequently affect cost of labor, level of contractor expertise entailed, and so on.
Keeping all of this information in mind, you can see why it is nearly impossible to obtain a ballpark quote when it comes to construction costs without specifying the site location and the ensuing the variables of that particular region.
In addition to determining the cost of new commercial office buildings, there is also the instance of office build-out. For those unfamiliar with the general terminology, a build out is defined by Wikipedia as an urban planner’s estimate of the amount and location of potential development for an area. Sometimes called a “lot-yield analysis,” build-out is one step of the land use planning process. Evaluation of potential development impacts, therefore, begins with a build-out analysis.
In the instance of leasing commercial office spaces, occupants or tenants won’t find exactly what they want as far as furnishings, fixtures, or even the floorplan of the space in question. As a result, the majority of commercial office building spaces will require some degree of office build out (also known as “tenant finish out”), whether it entails new carpeting and fresh paint, a demo of the existing walls (or building new walls), adding a sink with cabinets, and so on.
Oftentimes companies get overwhelmed with the notion of building out space or the cost involved, and never understand that it’s a negotiable item that the landlord will potentially pay for. Below, a few general guidelines to follow regarding office space build-outs, what a buildout means, average costs, and who pays.
Simply put, an office build-out is when a landlord’s contractor (or your contractor) perform construction on an office space to install walls, carpeting, paint, sinks, HVAC, ceilings, lighting, plumbing, bathrooms, and other such features, fixtures, and/or material finishes. The process of building out office space is also known as a tenant finish or commercial tenant improvements. Who pays for an office build-out depends on how you negotiate your lease contract. In some instances, the landlord will pay for 100% of a standard build-out; however, if you want high-end finishes, you may end up coming up a bit out of pocket.
The management of this process also depends on the size and scope of work. For most small jobs, the landlord’s property manager will manage the construction; however, in other cases (such as larger office leases), the tenant may choose to have their own project manager on the job. There are typically a couple of ways to go about negotiating this: you can either negotiate to have the landlord turnkey the build-out, or give a tenant an improvement allowance.
This refers to a build-out where the landlord builds out the space per the tenants’ specifications (and at the landlord’s sole cost). In other words, the property is upgraded and upon completion, move-in ready – all the tenant has to do is literally turn the key. During the lease negotiations, the tenant and landlord engage the landlord’s architect to design a mutually agreeable plan.
The allowances will all be building standard, and the tenant chooses the carpet and paint colors. The downside of a turnkey build out? The landlord may cut corners where they can to keep costs down, sometimes even purchasing lower-grade carpet, cheaper fixtures, etc., or hiring a contractor strictly based on price, not quality of services.
In this scenario, the tenant controls everything and can select their own architect, contractor, finishes, and so on. In addition, if they happen to stay under budget (and there is any TI allowance remaining), they may be able to use the surplus funds towards other items. The TI allowance is agreed upon during the lease negotiations, and the amount will be contingent on the lease term length, tenant financials, etc. Before finalizing negotiations and signing a lease, it’s considered wise for the tenant to obtain preliminary construction bids; this is to ensure that there will be enough money to cover the improvements, as well as determine unexpected out-of-pocket expenditures, if any.
While the notion of every commercial office space matching you or your tenant’s specifications is something we all dream of in an ideal world, the reality of that is rarely the case. A space in one building might be in shell condition (in other words, a first-generation space), meaning it has never been occupied before – all you see is a concrete floor and nothing else.
In another instance, you might have a space in a building that is a second-generation space, meaning it’s been built out and previously occupied. In either case, you might like certain features in both buildings; however, the existing office layouts don’t match your business requirements. For example, you may need five offices instead of three, or your client requests an open floor plan, so walls must be removed and the space reconfigured.
The cost of office build-outs are directly dependent upon the market you are in, the level of improvements desired, and the overall scope of work entailed. New spaces in shell condition (i.e., never built out or occupied) will cost more than second-generation (already built out & previously occupied) spaces. If you are simply installing new carpet and paint, the estimate will be considerably lower, contingent upon local market prices, labor, cost of materials, and so on.
On the other hand, if you are building out office space from shell condition, then you can expect the costs to be substantially higher for building standard level finishes. If the space has already been built out before and previously occupied, it may be a bit less per square foot; however, this still is directly linked to the scope of work and level of finishes required. It should also be noted that medical office space build-outs are typically more expensive than professional offices.
Determining who pays for the office build-out is dependent upon the length of lease term, level of tenant improvements requested, and the landlord’s perception of your company’s financial strength. If you can only sign a 12-month lease, then you more than likely would be taking the space “as is,” and any improvements you needed would be at your cost.
If you are able to do a 3-5 year lease, you can typically negotiate with the landlord to get them to pay for most if not all “standard” level improvements. If a landlord thinks your financial credentials are weak, then they will be less motivated to pay for improvements since you pose a credit risk to them. If a landlord doesn’t give any tenant improvement allowances, you may want to attempt negotiating some free rent or rent reduction to help offset build-out costs.
Depending on the scope of your commercial office building project, construction costs can vary a great deal across the United States. Whether you’re looking to take on a new construction project or build out a pre-existing office space, there are numerous factors that weight into your total expenditures. Before you begin any new office building project, you may want to consider the benefits of tools to track your project and help determine projected costs.
ProEst offers a complete line of professional software solutions – from Commercial Construction Cost Data with Assemblies to RSMeans Building Construction Cost Data, our RSMeans Construction Cost Database line of products track labor and material cost changes so you can ensure your project is running smoothly, on-schedule, and most of all, cost-effectively.