Major shifts in construction costs in commercial real estate interiors for office buildings is creating havoc when trying to reach the necessary levels of interiors improvements without damaging the rental rate negotiations. Exploding costs, many of which are founded in the increase in petroleum-based products in everything from carpet, adhesives, general conditions, and contractor's overhead is delivering a scorched-earth effect in the way real estate office leases are put together.
Deals once manageable with knowable construction costs now must fare the reality of dramatically increased rents just to keep the landlord's return on investment the same. The speed of the increases has made it difficult for landlords to accommodate required minimum tenant improvement allowances (TIA) for tenants while simultaneously seeking to retain their ROI by quoting competitive market rates.
Tenants must now understand that any quoted TIA by landlords may in fact be much less than the amount necessary to complete their basic interiors construction needs; and to anticipate paying higher-than-expected rents either as additional amortization of tenant improvements, or to pay for the improvements themselves.
It is likely that because of the swift movement in cost, the rent could change during negotiations, or between the lease execution and the delivery of the space for move-in. Like driving past a gas station one hour later to find the price up 15%.
To accommodate this volatility, office leases will become more like automobile leases where the final lease cost is not knowable until after each individual office lease transaction can be summarized - analyzing the required cash-out for construction - to determine monthly or annual rent payments. The burden to the office tenant is that more and more landlords will simply have no choice but to limit their cash contribution for tenant improvements, leaving more tenants required to cover these costs themselves (either by amortization as additional rent or paying cash).
Because general contractors will no longer be able to or unwilling to accept the risk in guaranteeing prices, landlords will be accepting the burden of increased construction prices and must have a place to pass this through, lest their return on investment be degraded dramatically. Accordingly landlords will develop lease documents to contain new features allowing landlords to immediately pass through construction cost increases directly to the tenant even before they move in.
Now more than ever, tenants require direct access to precise tenant improvement analysis and control of the process to manage the construction costs.
The Tenant Rep Agency headquartered in St. Louis Missouri USA has teamed with HOK the largest architectural firm in the world to provide its tenant clients with all the mechanisms necessary to determine construction specifications and evaluate construction cost estimates through Value engineering. HOK, having experience with construction costs world-wide can bring immediate real-time construction cost experience to mitigate or eliminate damaging cost overages. The Tenant Rep Agency website is http://www.tenantrepagency.com
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