Commercial construction and real estate are complex tasks and industries that require a LOT of attention to detail, organization, experience and a collaborative team approach. Just like when you’re purchasing a car, there are a lot of options and people involved with a lot of different paths your experience can take.
This white paper will highlight how you can get the most out of your real estate and construction teams while maintaining high levels of service, transparency, collaboration and efficiency. We also highlight the importance of identifying your project priorities. While we want everything to be #1, the reality is that you must prioritize between budget, schedule, aesthetics and quality. The sooner you do that, the more effectively your team can start working toward your goals.
Why is a “consultative approach” important?
Whenever we make big personal or professional decisions in life, we all like to know we’re making an informed decision that will solve our needs now and into the future (1 year, 5 years, 10 years, etc).
As a GC with local, national and international experience, we’ve seen a lot of different real estate and construction transactions. When it comes to construction, we love working with tenants/clients who are in the early stages of looking for space and lease negotiations because we’re able to help them make the right decision. Typically, brokers or construction project managers will ask us to provide pricing on 2-3 different spaces so they can get a sense for cost, schedule, scope and potential pain points. Here are three scenarios for a recent downtown, class-A 30,000 SF tenant:
- Mid/high lease rate, $40/SF TI allowance for a space that would take 12-14 weeks for construction and would cost $70-80/sf for construction.
- High lease rate, $20/SF TI allowance for a space that would take 10 weeks for construction and would cost $50-60/sf for construction.
- Mid lease rate, $60/SF TI allowance for a space that would take 12-14 weeks for construction and would cost $90- 100/sf for construction
Now, regardless of your level of experience with real estate or construction, we can see how each deal would pencil out differently. A LOT of tenants fly blind through this process and sign up for a lease that either doesn’t exactly suit their needs or they pass on a lease opportunity that could have been perfect for their current needs and would also suit their growth pattern.
Finding service providers that take a “consultative approach”
In 2019, nearly all major cities have a full spectrum of service providers, ranging from very high end to very cost effective. International companies like Google or Facebook are going to use a much different team than a local tech startup. A local tech startup will typically have a different team than a local law firm or manufacturing company. They key to success is finding a great team of service providers that guides you in the right direction now and into the future.
During your initial real estate search, it’s best to find service providers who will work toward YOUR agenda and NOT drive their own. Once you and your broker have identified and committed to 2-3 spaces, your broker should be working with a reputable GC with strong preconstruction capabilities to evaluate the cost of each space. Tenants get surprised that construction costs can vary so much from space to space and often times get sticker shock when they see dollar values. We understand this and we utilize a few tools to help tenants navigate this process.
Education is everything and this is where the consultative approach comes into play…
At this point, it’s imperative that someone puts together a master budget and master schedule. This is when you would look at hiring a 3rd party construction project managers (link to that white paper is here). We work as a full-service GC so we have templates we use but be careful because most GC’s will only provide you with construction cost, leaving a HUGE gap in your budget. Your master budget will include these major line items:
- Architectural design & MEP engineering
- Permits & inspections
- Construction, appliances, signage & branding
- Furniture (workstations and ancillary)
- IT / technology (low voltage cabling, A/V, security)
- Move services
As a rule of thumb, construction is generally 60-70% of the overall project cost. In #3 of the scenarios above, that looks like a great deal but if construction is $90-100/sf, that means the overall project will cost about $140/sf. If you back out the $60/sf TI allowance, the tenant is left with $80/sf to pay for and over 30,000 sf, that translates to $2,400,000 out of pocket. If the tenant has only been presented with construction cost up to that point, they may only be prepared for out of pocket expenses to cover the delta of the $60/sf TI allowance and the $90-100/sf construction range, which is $30- 40/sf or $900,000 – $1,200,000.
I don’t know about you but I don’t randomly have an extra $1,500,00 laying around to cover major unexpected real estate expenses. Unfortunately, this happens ALL THE TIME. In simple terms, the process should go like this:
- Find a highly recommended and trustworthy broker that is right-sized for your company
- Evaluate your options and short list 2-3 spaces that suit your needs
- (optional but recommended) engage a 3rd party construction project manager
- Work with an architect that can help with initial test fits and space plans
- Send test fits to a GC with solid preconstruction capabilities for pricing
- Develop a master budget and master schedule to serve as the road map
- Pick a space and work through lease negotiations
- Source architectural & MEP engineering proposals, interview firms and select the one you like best
- Source a GC – this can be done with fee & GC proposals early in design (best overall value and experience with minimal surprises) OR with a hard bid at the end of design (typical “old school” process) – see our other white paper here on this topic.
- Source a furniture dealer
- Procure materials
- Build your project and solve a few issues Install furniture
- Move in and enjoy your space!
The last 4 bullet points happen fast and take a lot of preparation by the entire team. Hopefully you can see how important it is to find a great team that will work toward YOUR agenda and set proper expectations. Nobody ever left a car dealership in a brand new $75,000 car for $50,000. Real estate is no different with the exception that people will tell tenants they can get their project done for $50,000 in the beginning, knowing they’ll have to write the $25,000 check 3-4 months later.
One last note: your TI allowance is not meant to cover your entire project cost. As the tenant, if the landlord gives you more TI allowance, you’re financing those dollars by paying higher rent. If the landlord gives you less TI allowance, your rent will be slightly lower. Tenants that think the landlord is “giving them a great TI allowance” to cover their entire project cost usually end up paying 30-50% additional cost during the last 3rd of the project.