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About the Author
Mousa Ackall is a tech marketing professional with 10+ years of experience in B2B technology, enterprise software and high-growth startups. In his role at Knotel, Mousa leads the company’s thought leadership platform aimed at educating customers on commercial real estate (CRE) trends, flexible office solutions and industry best practices. You can follow him on Twitter @mousAAckall.

The Real Cost to Build Out Your Office

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According to JLL’s 2019 Office Cost Benchmarking Report, a comprehensive guide to fit-out costs across the U.S. and Canada informed by 3,600 real project budgets across 17 industries, the average cost of an office fit-out increased by 12% in 2018, spurred by heightened demand for space and rising prices for labor and materials. The report is a behemoth – 32 pages of fibrous research and statistics – so we dug through it for you, here are the highlights.

 

Shared build-out costs and outlook

 

JLL predicts that costs of labor and materials are set to continue rising throughout 2019. Even though tenant allowances for build-out costs ticked upward in 2018, the result has still been higher out-of-pocket costs overall. “Of the total construction cost increase in 2018, 60% was offset by increases in tenant improvement allowances, and the remaining 40% was passed on to tenants,” the report states.

 

Adaptability is the answer

 

JLL notes that in years past, “Most tenants leased a space for seven to 10 years without updating it for the whole term of the lease.” Today, the majority of tenants want to update every year or two. The reason? According to JLL, because “business strategies emphasize iterative releases and constant development as the best model for success . . . occupiers and employees now expect it in their spaces as well.”

 

To satisfy these requests from the end user while seeing return on the initial build-out investment, landlords must build with flexibility in mind. “This adaptability can come in many forms,” the report states. “From layouts that require limited modifications to increase density, to rooms that are easily converted as space needs to change.” A primary goal for tenants, too, is the ability to make significant alterations every few years within the existing space rather than needing to relocate entirely.

 

Different styles mean different costs

 

The report breaks office style into three categories – progressive, moderate, and traditional – that it’s important to understand when planning a new space:

  1. Progressive – Open floor plan, 100% bench seating, no enclosed offices. Highly collaborative.
  2. Moderate – “Agile” floor plan, 10% enclosed offices, small workspaces, benching for visitors. Mix of conference rooms and collaborative spaces.
  3. Traditional – Thirty percent enclosed offices, large workspaces, no benching. Several conference rooms, one collaborative space.

JLL adds to the matrix a breakdown of pricing for each style:

  • Base – Low budget, focused on function. Basic technology and aesthetic.
  • Medium – Increased project complexity, upgraded lighting and design. Average materials.
  • High – Top-quality finishes and space improvements. More spent on aesthetics and detail.

Progressive offices range, on average, from US $147 to $167 per rentable square foot, Moderate from $170 to $196, and Traditional from $193 to $224.

 

Market Spotlights

 

Atlanta: Creative office inventory has more than doubled since 2014. Construction costs are rising, but steady demand has fueled a 15% increase in Urban Class A rents during the past 18 months.

 

Boston: Adding more than 500 firms in the last five years, Boston has emerged as one of the world’s leading tech hubs, driven by young talent. Traditional offices are out, and light-filled collaborative spaces are in. Class A rents jumped by 8% in the back half of 2018 alone.

 

Chicago: Chicago has quickly become home to tech giants and Fortune 500 headquarters. Young talent and affordability mean a diverse range of industries looking for their next headquarters. The city is riding record leasing numbers in 2018 and 13 straight quarters of net positive absorption.

 

Los Angeles: Coworking spaces have taken over – 1.1 million sq. ft.  in 2014 grew to 4.3 million at the end of 2018, illustrating the remarkable demand for flexible leases and amenity-rich workplaces. With new media content budgets forecast to double, there is likely to be significant space demand across the market.

 

New York: More efficient spaces are trending, and vacancy is at a cyclical low of 7.2% overall. Leasing activity is strong and positive absorption has made for constricted supply, but new developments in Hudson Yards/Manhattan West may alleviate this supply.

 

San Francisco: Access to talent and resources has made San Francisco one of the strongest technology markets in the country, but supply and demand is off-kilter, pressuring rents to jump 9% year over year. With Prop M development restrictions, little relief is in sight.

 

Toronto: The war for talent between TAMI (technology, advertising, media, and information) tenants and traditional occupiers along with competition for talent, means businesses are seeing office space less as a cost function and more as an investment in recruitment. The result is more open-air, amenity-focused spaces. 2017 saw a record year of absorption and rent growth; 2019 shows no end in sight to demand.

 

Washington, D.C.: Traditional drivers (law firms, nonprofits) remain focused on reducing their footprints and construction costs have significantly increased. Class A vacancy is slated to rise beyond 15% over the next two years due to the delivery of 4 million sq. ft. in 2019.

 

The Big Takeaway

 

These days, as the workplace continues to evolve towards increased flexibility, investing in static build-outs that may not see long-term use is simply not a good use of capital. Companies in the market would be well advised to consider a buildout with the capacity to adapt to future changes, or to work with a flexible office provider that can use economies of scale and in-house experts to streamline the fit-out/build-out process.

 

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