Tenant improvement is all about optimizing a leased space for commercial use. It is a very client-specific project, as commercial applications differ between businesses. A well-planned commercial buildout navigates within your budgets and timelines – and primarily meets your business needs. As a tenant, you want to move into the building with an established goal and equipped premises to reach that goal. This is why an ideal project plan will put your brand under the corporate spotlight and create lasting impressions on clients, sponsors, partners, etc. One of the first things to chase is the cost for a complete tenant improvement, and it is a crucial part of your lease. The tenant improvement (TI) allowance is the amount your landlord or landlady will cover for a part of the total buildout expenses – which accumulate per square foot of your building.
These tenant improvement costs per square foot depend on several factors like your project scope and location. A new commercial building, also known as a first-generation building, tends to be more expensive than a previously occupied space – the second-generation building. This is because you invest more in bringing a blank canvas up to a functional standard compared to repurposing an old buildout. This article walks through the various cost breakdowns according to square footage – inspiring itemized bids that you can request from your contractor.
Tenant Improvement Costs per Square Foot
When you plan to start a new business or change locations, the costs of tenant improvement rank first in your list of priorities. This becomes even more significant when you have already negotiated a budget with the owner. The general cost of building out an existing space is governed by its condition, your commercial expectation, various permits, material qualities, etc. You can expect rough estimations such as:
- low range buildouts at $50 – $80 per square foot
- middle range buildouts at $81 – $135 per square foot
- high range buildouts at $136 – $200 per square foot
- custom finish or special use buildouts at $200+ per square foot
First-Gen and Second-Gen
The “generational gap” between buildings is another deciding factor. You will typically pay more to build out a first-generation (shell) space compared to a second-generation space. This is because upscaling from a blank shell or gray shell requires adding all the utilities and functionalities for the first time – creating the need for capital improvement projects. So, you can expect an additional $10 per square foot to your original estimates when you are working on a first-gen space. If you are leasing a second-generation building, it will already be equipped with most amenities like electrical outlets, technological framework, HVAC units, etc. The previous tenant will have installed the basic additions, so you would just need to pay for accommodating your needs (assuming that you like the systems that were previously installed).
- first-gen buildouts: $70 – $200 per square foot
- second-gen buildouts: $50 – $165 per square foot
The quality of corporate interiors strongly affects the average tenant improvement costs per square foot. Custom finishes with high-end materials are naturally more expensive and aim towards quality-driven outcomes. They set the bar for executive offices in the commercial world. A basic office space would use just the standard lighting, millwork, HVAC units, and finishes (floors, ceilings, painted wall) would give you the most affordable price tag.
Upgrades to wood veneer, wall-sized glass windows, high end carpet, and extensive utilities will make a mid-range buildout. Finally, the executive office space claims the heaviest price tag, with custom artwork, granite, acoustical fabric, and premium products stealing corporate glory. This is one of the reasons why the average cost for just interior finishes has been on an upward trend over the years. Some interior improvement costs include:
- office spaces: $51 – $157 per square foot
- phone and computer cabling: $2 – $3 per square foot
- furniture: $28 – $80 per square foot
- gym: $155 – $210 per square foot
- conference rooms: $150 – $205 per square foot
- dining and kitchen: $162 – $241 per square foot
Hard Costs vs Soft Costs
These two types of improvement costs help you understand your investment better – and build the ground for impactful negotiations with the owner. Hard costs refer to the actual physical improvements made to a building. These modifications tend to remain in place even after you – the tenant – vacates the premises at the end of your lease. So, these hard costs actually benefit the owner in the long run, since you have paid for the major infrastructure and utilities to support your occupancy. Some examples are doors, windows, paintwork, millwork, HVAC units, acoustics, electrical frameworks, plumbing, and carpeting. This also means that all the material and labor cost contributions are covered as well – making hard costs devour most of the buildout pie chart.
Soft costs take up a considerably less proportion of your total improvement costs. They do not offer physical improvements to the property. Instead, these costs cover the approval, service charges, tax, and supervision needed to fuel the actual project. They may include building permits, inspection fees, and various contractual elements.
- hard costs consume around 75 – 85% of the total improvement
- soft costs consume around 8 – 12% of the total improvement
Online Tenant Improvement Cost Calculators
Various tenant improvement buildout calculators can be found online to receive averages per square foot. They usually take in details like your commercial application – for example, retail or office – and your location. They might also ask for numerical specifications that you can choose from drop-down lists. On the whole, an online tool follows the most recent calculation methods based on the latest costs in the construction market. You can receive estimates per square foot or a final cost if you have entered the total square footage. Two of such tenant improvement calculators are:
- Hurd commercial buildout cost per square foot
- Mindful Design Consulting tenant improvement calculator
Square Footage Factors
The average costs per square foot will always fluctuate with certain factors. They affect your total investment because your project can never begin without considering these areas. You need a good vantage point to optimize the square footage and distribute the costs efficiently. Some of the factors that drive your building’s per square foot costs – and potential – include:
- your tenant needs for commercial specialties – like restaurants and schools
- the age and condition of the building – the generational differences, renovation size, etc.
- the material and labor costs – based on regions
The TI allowance that will fund some part of your buildout is also calculated per square foot. You will negotiate these costs with the building owner as a part of your lease agreement. In a tenant improvement buildout, you stay at the frontline of the improvement process – unlike turnkey projects where the owner takes care of everything. This marks a pivotal difference in the financial leverage you can gain as a tenant planning the improvement. Since the building owner provides your TI allowance, your final improvement cost per square foot is actually the initial cost minus your TI allowance.
Negotiating Your TI Allowance
The allowance you receive from your building owner will cover most of your tenant improvement costs. This amount is entirely negotiable, and you must grab the opportunity to secure an optimistic deal. You should also bear in mind that your landlord/landlady might choose to reclaim the offered money – in the form of increased future rents, for example. So, it all boils down to a well-planned negotiation process that works for both parties. You want a fully-functional place that guarantees a successful corporate dream; the owner wants a quick and confirmed move-in. Good negotiation eliminates conflicts down the road and ensures smooth occupancy throughout your lease. Here are a few tips for making the best bargain with your building owner – and they all require you to do a bit of research.
Know Your Commercial Breakdown
Tenant improvement costs per square foot will differ based on commercial use and the level of customization needed. It helps to know your project as thoroughly as possible so that you can negotiate your allowance confidently. And the more you learn in advance, the sooner you can occupy a space that fits your standards. Different commercial spaces will require specific improvements to run those businesses. For example:
- Office tenant improvements usually focus on open and collaborative workspaces, traditional enclosed offices, conference rooms, meeting areas, reception, breakrooms, socially-distanced workstations, lounges, and various remodeled floor plans.
- Call center tenant improvements would include technology upgrades for call stations, private offices, conference rooms, reception areas, etc.
- Restaurant or café tenant improvements require extensive work on the dining areas, kitchens, prep areas, and an overall spatially optimized layout for easy foot traffic.
- Learning centers and institutes might need special improvements to include a gym and an auditorium in addition to the classrooms and offices.
- Healthcare and hospital tenant improvements are usually more expensive than others because of their medical and technological specifications. These include heavy-duty flooring and infrastructure to support the medical equipment, safety considerations for the radiology rooms, department-conscious electrical/plumbing/HVAC units, etc.
- Retail improvements often have common basics like dressing rooms, custom lighting, cashier counters, and aisled floor plans.
Your total cost per square foot is the combined result of all the individual changes you have planned to support your commercial operations. For each room and finished space, the required functional and cosmetic upgrades add to the final cost. So, if you have a small startup business, consider leasing mostly finished and equipped premises to save time and money.
Take Professional Advice
A smart way to understand your commercial standpoint and costs is to enlist the help of professionals and get a clear picture of your business goals with their relevant finances. You have to consider your lease terms carefully and make sure that you do not bite off more than you can chew. You also need to know the scope of your project before signing the lease so that you can receive enough allowance to cover the whole improvement. This includes knowing your numbers – and understanding what goes where. So, before you even start negotiating with the building owner, consult tax advisors, accountants, potential contractors, project managers, and interior designers. Collaborating with experts will give you better insights into the project costs per square foot – and you can decide if the owner is presenting a valid allowance offer. The more awareness and fluency you demonstrate with numbers, the stronger your negotiation is going to be.
Clarify Your Expectations
Another benefit of discussing with your experts is that they can guide you about core issues like legal implications, tax responsibilities, who gets more control over the buildout, where the unused TI allowance goes, and the official rent date. Using their advice, you can negotiate your right to choose your own buildout team and have more freedom with customizations – compared to accepting whoever the owner hires.
You might want the unused allowance for covering any future upgrades, so this is something you must bring to the negotiation table. Seeking professional advice beforehand will also help you negotiate the terms of your lease better with the owner when it comes to the liability sections, for example, who bears responsibility when something goes wrong. Apart from working out a reasonable TI allowance per square foot, these expert consultations shed a lot of light on lease perspectives – so you will know exactly what to include in black and white and prevent legal setbacks down the road.
Discover Win-Win Areas
Tenant improvements usually benefit both the building owner and the tenant for many reasons. A tenant is more likely to occupy an improved and equipped commercial space that works perfectly for their business. This in turn means confirmed occupancy and incoming rents for the landlord/landlady. Also, if the owner agrees that your added changes to the space will make it more rentable for future tenants, then that is a huge tick box for a TI allowance. Anything that helps owners rent out their space consecutively will encourage them to cover your tenant improvement costs per square foot. Since the renovations you introduce will stay there after you leave, you really have no way of recovering any personal spendings on the project. For this reason, talking to an expert can help you avoid overspending on improvements – only to leave them behind after a short-term lease. You can consider bringing up such permanent improvements during your negotiations to increase your chances of a more inclusive allowance.
Another win-win situation would be an improvement that extends to other tenants in the building. Lobby renovations that benefit your business will automatically influence the other tenants as well. If your leased floor in the building has no space for employee recreation, and you plan to add a common recreation room/breakroom/gym on the ground floor – accessible to all tenants – then this is all the incentive an owner needs. In this way, what appears to be project funding to you might actually be added property value to the owner. To make the best out of the available space, take your evaluations, measurements, and initial costs per square foot to your experts. Understand the potential at hand and think outside the box with them to reach such win-win possibilities.
The Pandemic and Its TI Cost Per Square Foot Impact
The COVID-19 outbreak has influenced socially distanced workstations and downsized businesses in its wake. This did result in a staggering impact for buildout scopes, with startup firms already redefining the commercial footprint. Increased transitions to Zoom offices should have reduced the average buildout costs per square foot. However, the pandemic also introduced bans on construction supply streams like manufacturing and transportation – causing a spike in material and labor charges due to resource scarcity.
Most businesses aim to keep up their brick-and-mortar presence by implementing COVID-proof precautions. This is why the construction and buildout services are expected to stay immune from the COVID impact. The increased costs per square foot during these times will, apparently, decide the future trends with companies working hard to remain open.
The Final Takeaway for TI Costs per Square Foot
Before you embark on the tenant improvement life cycle, make sure to get your financial bearings mapped out clearly. You will improve a raw commercial space to adapt to your business scope, so there is a lot of room for customization. The upgrades and new additions should reflect your brand identity, employee satisfaction, and reputation with clients. Most improvement projects these days focus on workspace evolution to maintain a COVID-proof environment and promote creative collaborations.
The traditional buildout portfolios are abandoned in search of new ideas, especially by startup companies who want something original. Creative spaces and quality improvements are at the nucleus of every custom buildout, as tenants do not just want a fitted-out space to move in – they look for dynamic interiors for inspired working. As a result, your project size and complexity determine your tenant improvement costs per square foot. You want to configure and personalize the space uniquely and receive accurate buildout quotes from your contractor. This brings us to bid itemization, which adds enormous relief when you are trying to narrow down the contractor pool. Finding out exactly what you will pay for gives you a good head start in budgeting and finalizing. Most importantly, it reinforces your end of the negotiation with the owner, so you can strike up a good bargain that won’t hesitate to walk the extra mile in your buildout.