COLLIERS MINNESOTA

The Changing Dynamics of Tenant Improvement

 

Most professionals working in commercial real estate know that construction and remodel prices are increasing, especially when talking about tenant improvement (TI) for office space.

 

Meghan Huber, Vice President and Director of Tenant Improvement at Welsh Construction, notes that the rising cost of TI is reflected first and foremost in basic construction materials. She says, “In our experience, TI costs have risen approximately 4-5% year-over-year since 2014. With the 2017 lumber tariff and the 2018 aluminum and metal tariff impacts, we expect the 2018 overall cost increase to be about 5-6%.”

 

Despite these costs, companies know that office spaces must become more and more focused on creating a workplace with aesthetic design, employee wellness and amenity options in order to retain and attract talent.

 

So how are companies balancing their budgets for TI while still affording to make their spaces attractive to employees?

 

This budget balancing act arguably begins with the negotiation of lease terms. Mike Brehm, Vice President of Colliers MSP, has negotiated several different tenant improvement deal parameters on behalf of the clients he serves. In order for tenants to get the improved space they want but also keep costs down, according to Brehm, there are work arounds. He says, “One option is to sign longer term deals in the 10-year range because landlords are willing to accommodate higher TI’s and are either amortizing the additional costs into the base rent or not providing other concessions such as offering free rent.”

 

However, on the other side of the coin, with these higher costs, landlords are sharpening their pencils and taking a much harder look at tenant’s financials and credit before signing leases with TI.

 

After an expert tenant rep broker has negotiated the strongest TI package for a tenant within their unique budget, the TI project begins. So, while tenants are looking for unique build-outs more than ever, costs for all aspects of TI projects are going up, from raw materials to custom lighting, and with some consolations, companies don’t necessarily need to spend more money.

 

Katie Berggren, Lead Project Manager at Colliers MSP, has seen this trend in her role managing numerous TI projects, both big and small. “By cutting costs in some places and not others, tenants are not necessarily paying more for their wish list. Though $50 is the new $30, total dollars are not rising, but the cost for things are,” Berggren said.

 

TI projects become about budget adherence to get what a company wants, or close to what they want, plus some things on their wish list. The Project Management teams at Colliers MSP are finding there are some key trends that are driving up costs on TI’s:

         

> All glass and aluminum frame systems for enclosed spaces rather than traditional sheetrock and hollow metal framing are a costly new trend.

 

> Open ceiling concept rather than regular ceiling tile is something that has really gained traction within the last 3-5 years and is more expensive than the more typical acoustical ceiling tile and grid system, due to higher costs for mechanical, electrical, plumbing and painting, as well as higher rates for technology vendors and other trades.

 

> Collaboration spaces that feel more like a high-end coffee shop than a traditional office space are a hot commodity, as employees desire more than one location to be able to work from, rather than being stuck inside of a "cubicle farm".

 

> IT departments still traditionally cable everything, even though there is wireless available nearly everywhere, which is a redundant cost.

 

> Audio/visual equipment is now being used in almost every conference room, when previously companies would equip only one or two rooms.

 

> Card readers are also trending to replace traditional lock and key systems, which is another added cost.

 

Ultimately, it is important to understand that while these trends are on the rise, so are costs, so setting expectations and budgets early on in the process is essential to a successful negotiation of any TI project as well as the management of build-out. Because while costs of materials and labor are going up, the overall spend in total tenant improvement budgets generally are not. Tenants and their advisors will continually need to find creative solutions in the deal stage, planning and construction phases to find ways of providing the most bang for the budget.

 

Amy Staudinger

Senior Director, Project Management

Colliers International | Minneapolis - St. Paul

Connect with Amy

 

 

 

 

Katie Berggren

Lead Project Manager

Colliers International | Minneapolis - St. Paul

Connect with Katie

 

 

 

 

Mike Brehm

Vice President

Colliers International | Minneapolis - St. Paul
Connect with Mike

 

 

 

 

Meghan Huber

Vice President and Director of Tenant Improvement

Welsh Construction

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ABOUT COLLIERS MINNESOTA

Defined by our spirit of enterprise, Colliers Minnesota is a leading, full-service commercial real estate services organization.  We are dedicated to providing clients with innovative real estate solutions and the most comprehensive market knowledge. We specialize in understanding our client’s unique business needs in every commercial property type.

Headquartered in the Twin Cities with regional offices in Minnetonka, Minneapolis and Shoreview, Minnesota, Colliers International | Minneapolis-St. Paul consists of more than 240 local professionals. Our expertise extends into every aspect of today’s commercial real estate business including architecture, brokerage, facility services, investment sales, project management and property management.

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