When looking for commercial office space to lease you typically don’t find exactly what you want ready to move in. Most spaces are going to need some sort of office build out (aka tenant finish out) whether it be new carpet and paint, demo walls / build new walls, add a sink with cabinets, etc. Many companies get overwhelmed with the thought of building out a space or the cost involved and never understand that it’s a negotiable item that the landlord will potentially pay for as long as you have good financials and meet a few other terms and conditions. You never know until you ask right? Below we give a few rules of thumb to follow on office space build outs, what a buildout means, average costs, and who pays.
What Does an Office Build Out Mean?
The definition of an office build out is basically when a landlord’s contractor or your contractor do construction on an office space to install walls, carpet, paint, sinks, hvac, ceiling, lighting, plumbing, bathrooms, etc. The process of building out office space is also known as a tenant finish out or tenant improvements. Who pays for an office build out depends on how you negotiate your lease contract. In some cases the landlord will pay for 100% of a standard build out, however If you want high end finishes then you may end up coming out of pocket a little. 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 ways to go about negotiating this. You can either negotiate to have the landlord turnkey the build out or give a tenant improvement allowance
Turnkey Office Build Out
This is where the landlord builds out the space per the tenants specifications and at the landlords sole cost. All the tenant has to do is turn the key. During the lease negotiations the tenant and landlord engage the landlords architect to design a mutually agreeable plan. The allowances will all be building standard and the tenant picks the carpet and paint colors. The downside of a turnkey build out is that the landlord will cut corners where they can to keep costs down, sometimes even purchasing lower grade carpet or picking a contractor strictly based on price not quality. If you are leasing less than 10,000 sf or doing a short term lease then in most cases this method is fine.
Tenant Improvement Build Out
In this situation the tenant controls everything and can select it’s own architect, contractor, finishes, etc. Also if they stay under budget and there is any TI allowance remaining they may be able to use for other stuff. 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 a good idea for the tenant to get preliminary construction bids to ensure that there will be enough to cover the improvements and how much they would need to personally come out of pocket if needed. If you are leasing more than 10,000 sf then this is the best way to go.
Why Tenant’s May Need An Office Build Out
You may think that every space is going to match your needs exactly and be move in ready however that is not often the case. A space in one building could be in shell condition (aka 1st generation space) meaning it has never been occupied before and all you see is a concrete floor and nothing else. A space in another building could be 2nd generation space which means it has been built out and occupied before. In either case you like both buildings however the existing office layouts don’t match your business needs. For example maybe you want 5 offices instead of 3 or you don’t want any offices at all so you ask that they all be removed.
How Much Do Office Build Outs Typically Cost?
Office build out costs depend on the market you are in, level of improvements and scope of work. New spaces in shell condition (never built out or occupied) will cost more than 2nd generation (already built out & previously occupied) space. If you are simply installing new carpet and paint then estimate about $6-10 sf. If you are building out office space from shell condition then expect the costs to be around $40 to $50 sf for building standard level finishes. If the space has already been built out before and previously occupied then $15 to $30, however again that depends on the scope of work and level of finishes.
Medical office space buildouts are also typically more expensive than professional offices and average $50 to $100 sf.
They key to getting the best price is to get at a minimum 2-3 construction bids before signing a lease. That way if the estimated costs are above what the landlord is offering for the tenant improvement allowance then you can go back to the negotiating table and ask for more.
If your building out Austin office space and you want the landlord to pay for the tenant improvements then expect the lease term to be at least 3-5 years or more, unless you pay for the build-out costs yourself.
Who Pays for the Office Build Out?
That depends on the length of lease term, level of tenant improvements that you are asking for, and the landlord’s perception of your companies 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 financials are weak then they will be less motivated to pay for improvements since to them you pose a credit risk.
If a landlord won’t give any tenant improvement allowance then try to negotiate some free rent or rent reduction to help offset built out costs.
In summary in most cases you will need to make a few or a lot of changes to a space to meet your current and future business needs. If you plan on being there for the next 3-10 years then you want to build out the space in a way that makes you happy. Just make sure before you sign a contract to know all of the tenant improvement costs up front and how much the landlord is willing to pay for the office build out costs. That way you know up front how much out of pocket you will have to pay at lease signing.