You’re looking to get your company into a new office space, all you need to do is pay the security deposit, the rent, and you’re good to go, right? Not so fast. Much more than with residential space, office space needs to be built out before a tenant can occupy it. Whether that is building out a space from shell condition (completely raw) or retrofitting a previously-occupied space, construction needs to be done before a space can be occupied. Here’s how this works in practice and how much it might cost.
The first element to consider is whether the build out is a turnkey build out or a build out with a tenant improvement allowance.
In a turnkey build, the landlord does all the work for the tenant. The only thing the tenant needs to do is turn the key and move in their stuff. While this route is easy for the tenant, it can also have downsides as well. Landlords may try to use the cheapest materials and labor, and the result can be suboptimal. The tenant also has minimal control over how the space turns out.
In a build out with a tenant improvement allowance–also known as TI–the landlord will give the tenant an allowance of money, and the tenant will be responsible for the rest of the build out costs. With the tenant in control of the build out, they are able to choose the contractors, the materials, and are able to control the costs associated with the build out.. According to research by JLL, the average Tenant Improvement Allowance in 2017 was $43.61 per square foot.
When building out a space with TI, there are going to be two different cost levels. The total cost of the build out which is how much it actually costs all in and the out-of-pocket cost, which is how much you pay as the tenant. The out-of-pocket cost is going to be the total build out cost minus the tenant improvement allowance. From a tenant perspective, the out-of-pocket cost is more important.
There are numerous factors that contribute to the cost of the build out but the two biggest are materials and labor.
The materials that go into the build are going to have a huge impact on the overall cost of the build. If you use cheap carpet, cheap lighting and ceiling design and have entry-level finishes, your materials costs are going to be very low.
If, however, you go with high end finishes, wood walls, lots of glass, beautiful tile, high end carpet, recessed lighting, the materials costs are going to be much higher.
Labor is the other large factor that goes into the construction costs of a build out. Construction is extremely labor intensive, and this cost will represent a large percentage of the overall build out cost. And labor costs can vary widely. In places like New York City, for example, the use of union versus non-union labor can result in labor costs that are twice as expensive or more than non-union.
Ultimately, the final number will depend on the amount of work being done and the tenant allowance but will typically range from $20-30 at the low end for building out a space that has already been occupied and can be repurposed, to $40-$70 for what is considered building standard, to $100-$200 at the higher end of the spectrum.
