Most commercial spaces will not be move-in ready.
That may sound concerning, but this serves as a great opportunity for your business.
The commercial property remodeling market size reached $45.24 billion in 2022. Many commercial spaces will need renovation work and updates before the business can open their doors. This gives you the chance to improve your space’s functionality, layout, and aesthetic.
In this article, we’ll go over what commercial build outs are, the costs involved, and who pays for them.
Let’s lay the foundations first.
A build out is any constructional change to a commercial space. For example, you may need to build out a waiting area for your dental office, rearrange the layout of the floor plan, or change the HVAC system. To do this, you’ll need a team of experts to get the job done.
In a build out you may work with:
Many build outs serve to uphold the functionality of a space, but smaller projects also fit under this category. If you’ve found a newer building that is in need of less renovations you’re in luck. But you may still want to design the space for your needs, add a fresh layer of paint, or add a branded wallpaper. Whatever the project may be, big or small, a build out will bring your plans to life.
With your list of renovations plans piling up, the total cost is sure to add up quickly. Let’s take a look at the different types of costs that go into build outs.
Simply put, hard costs cover the physical changes made to a commercial space that will stay even after a tenant leaves. Hard costs also include the labor needed to complete the project.
Examples of hard costs include:
Soft costs, on the other hand, are costs indirectly related to the construction of the site. Rather than being physical, these costs are in-tangible, but are equally important to the success of a build-out. Your construction labor percentage should be anywhere between 60%-75%.
In general, the contractor chosen to manage and oversee the renovation will try to stay below budget, but it’s important that you have an understanding of the costs related to a build-out.
As you can see, renovations on commercial spaces have many moving parts. There are other factors to consider that will affect your build out costs before construction even begins.
1. Property type and condition
The condition of your commercial space will have a large impact on the amount of time and money you spend on your build out. A building’s property type can fall into one of three groups: Class A, Class B, and Class C. Depending on which class your building falls under, your build out costs will vary.
You will likely spend little to no money on renovations if you’ve rented a Class A building. The modern buildings under this category are up-to-date with high-quality finishes. If you still have room in your budget, you might choose to add some personalization here and there.
Class B buildings are average buildings that will occasionally need some touch ups and system updates. Class C buildings have below average rents, but will also have the most build out costs. You are most likely to spend the most on build out costs in Class C buildings.
2. Renovation material costs
The cost of materials you use in the construction of your commercial space will have a direct impact on your build out costs. That’s why it’s crucial to take time to find the right construction company for your project. Compare multiple bids from contractors and choose one that has a great working relationship with their suppliers. The right contractor will effectively negotiate prices for you and ensure the project is complete within your budget.
3. Tenant requirements
As the tenant of a commercial building, you will have the vision not only for your brand, but for your space as well. Your business has to be accommodating, inviting, spacious, and functional.
Besides the basics, you may also need specialized upgrades or equipment, add walls, or begin construction from scratch.
So now we’ve taken a look at what goes into a build out, the costs to consider, and what can affect these costs. Who pays for the renovation?
When it comes to paying for your next commercial build, negotiation is the name of the game. Typically, you’ll have a landlord who will either cover some of the renovation cost. Rarely do they pay 100% of the build outs (usually 30%-50% for office and not much for retail), unless you are a credit rated company in a new Class A building. A lot of times the tenant may take on the full cost themselves.
However you decide to go about paying for your office build out, keep in mind that negotiation is crucial to the final deal.
There are many ways to pay for your office renovation depending on what you’ve negotiated with your landlord. The most common landlord-tenant agreements are Standard Allowances, Rent Discounts, and Turnkey Build Outs.
A Standard Allowance Agreement includes a set of pre-approved improvements set by the landlord. These are typical changes most businesses would benefit from such as new paint colors, flooring, and wallpaper.
A landlord might offer a rent discount to its tenants to garner interest in the space. This could mean that the build out later on will need more work, however it's a more affordable option up-front.
In turnkey build outs, the landlord is responsible for covering the cost of major physical improvements. This offers more flexibility to the tenant, as landlords are aware that the original space needs to work for your requirements. Under the turnkey build out agreement, however, the cost of minor changes such as chairs, tables, paintings, and other temporary fixes are your responsibility.
Not ready to burn through all your cash just for your move-in? Is your landlord not budging when negotiating?
Traditional commercial real estate deals lock up precious cash and waste valuable time on lengthy negotiation, and builds. Aikito built a better way to finance your space with zero upfront capital requirements and smooth transactions that puts your dream space within reach.
With Aikito, now everybody can have a beautiful, sustainable space – so you can invest in building your brand, not just your footprint. Get in touch with us today.