Current Cost of Tenant ImprovementsMarch 6, 2018
A few weeks ago, I received a nice summary on the current costs of tenant improvements (TIs) in the Bay Area and I thought I’d share the report and a few thoughts on how codes affect TI costs. Per the report, the cost for TIs in the Bay Area are in the $147-$164/sq. ft. range. Over my 18 year real estate career, the increase in TI costs seem unbelievable. I can remember when you could get a fully built out office space for around $45/sq. ft. If you take a look at the attached Tenant Improvement Cost Comparison, you will notice that the days of $45/sf improvements are a thing of the past.
What’s behind the costs of these improvements, you ask? The cost of supplies, cost of labor, supply and demand, and changes in the code requirements have all impacted the costs of TIs. Of the four listed, I would like to focus on the changes in code and share how they have played a role in the increased costs of TIs.
We’ve seen recent changes to Title 24 (California Title 24 Building Energy Efficiency Standards) and updates in the ADA code (Americans with Disabilities Act). California’s Title 24 Building Energy Efficiency Standards are designed to ensure that new and existing buildings achieve energy efficiency and preserve outdoor and indoor environmental quality. Title 24 covers areas such as the HVAC systems, thermostats and temperature controls, insulation, electricity, and operating equipment in the building. One way that we’ve seen Title 24 increase the costs of TIs have been in lighting. Based on the code, if you modify more than 10% of the light fixtures in your space, you need to replace all the lighting with more efficient LED fixtures. This category alone has been responsible for about a $10/sq. ft. increase in the overall costs of TIs.
Another area of cost increases are around ADA code upgrades. In the past, landlords had to update their buildings whenever they did permitted TI projects. When applying for a permit, the city officials would review the improvements along with the building and see if there were areas that didn’t meet the code and they would usually require a percentage of the TI dollars to be spent on ADA code upgrades to the building. This would never bring a property fully code compliant on ADA but it would fix some of the outdated areas. Today, there is a threshold that a building owner can spend on the building prior to being required to make the property fully ADA compliant. This cost can be significant for some buildings which can potentially add to your total TIs budget. Another way to look at a building that does not meet the current ADA code is the TI dollars that the landlord offers may not go as far as you think because a large portion of those funds may need to go to ADA upgrades.
How does this effect tenants? The effects can result in higher rents, tenant’s sharing in the costs to build out a space, or, in some cases, taking a space without any improvements so code upgrades aren’t triggered. If you understand what code issues your occupancy will trigger then you can determine how far your TI dollars will actually go. When negotiating a lease it can be important to work with a professional that knows the right questions to ask and help guide you through the negotiations ensuring your interests are being represented. If you have any questions about how to navigate an upcoming lease negotiation, don’t hesitate to get in touch with me at Chris.Crabtree@cushwake.com or call me directly at 925-621-3850.