Tenant Build-Outs Going Strong
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No matter what the economy companies grow, change and need updated facilities to
perform their business. Today, with slow conditions in just about every market,
Tenant Build-Outs are a bright spot on the economic map.
Vacancy rates are improving and tenant build-out activity is expanding for the
industry. The Society of Industrial and Office Realtors® (www.sior.com), in its
SIOR Commercial Real Estate Index, an attitudinal survey of more than 360 local
market experts1, shows a firming up of market fundamentals. The Index, measuring
the impact of 10 variables, rose 6.8 percentage points to 57.5 in the first
quarter of the year, the highest since the fall in 2008. The Northeast and South
drove the improvements in the first quarter.
improving economy and job creation mean growing demand for commercial real
estate, according to the National Association of Realtors® (www.realtor.org).
Lawrence Yun, chief economist for the National Association of Realtors said job
creation will be the biggest factor moving forward. “Job growth creates demand
for commercial space, and the economy should be adding between 1.5 million and 2
million jobs annually both this year and in 2012, with the unemployment rate
falling to 8% by the end of next year,” he said. “Given the minimal new supply
in recent years, the rising demand means vacancy rates will be trending down in
the commercial real estate sectors. Individual markets are now stabilizing and
in some cases rising.”
Gallo, head of Business Development of Gallo Herbert Lebolo in Deerfield Beach,
Fla. reports an increase in the amount of inquiries by tenants for new locations
and also renovations. “We do a great deal of food service build-outs in health
care industries and at state universities. In 2010, our firm completed 29
build-outs. Clients are doing less new construction but are renovating to stay
current. Our jobs vary in size and cost depending on the use and client scope of
Detroit has one of the highest vacancy rates in the country at 26.6% as of April
2011. Even so, Dominic Maltese, president of D.J. Maltese Corporation, Plymouth,
Mich. says inquires for build-outs have picked up in the last month. “There is
still a lot of vacancies, really no change from last year, however we have seen
some increased inquiry activity for build-outs in the last month,” said Dominic.
“Our build-outs range from 2,000 to 12,000 square feet and in price from $25 to
$300 per square foot. Our clients want a good layout, kitchenette with lunch
room, nice lobby, and nicer finishes – all completed fast.”
the first quarter of 2011, Tampa, Florida’s overall office vacancy rate
decreased two-tenths of a percentage point to 18.7% from year-end 2010, and when
compared to this time last year vacancy was down nine-tenths of a percentage
point according to a report May 5, 2011 by Cushman & Wakefield commercial real
estate brokers and consultants.
Superior Structures, Inc. of Tampa, Fla., a commercial contractor specializing
in commercial interiors for institutional work including hospitals, schools, and
retail is experiencing heavy growth in tenant build-outs. David Lenz,
Pre-Construction Manager for Superior Structures reports they are under contract
for more than a dozen build-outs so far this year up from 5 total in 2010. “We
are getting a tremendous amount of inquiries for build-outs. We are getting so
many we are no longer bidding outside of a smaller region,” reports Lenz.
Tenant build-outs can vary from small to large projects encompassing thousands
of square feet. This holds true for Superior Structures. “Our build-outs range
from new small chain restaurants of 3,000 square feet to the relocation of
larger offices for clients that want to create a new, positive working space.
Tampa with its availability of tenant space, clients can find locations in the
20,000-plus square foot range.”
As the chief estimator for Superior Structures Lenz has to stay on top of labor
and material trends to get the job and also make a profit. “The greatest cost
impact recently has been the increasing world wide cost of steel along with the
increased cost for gypsum products. However, this has allowed a reversal of
single digit margins and has increased everyone’s bottom line,” stated Lenz.
Labor supply also is a constant concern for Lenz.
The Cost of LEED
In today’s market clients want to do the right thing environmentally but are
less willing to spend the extra dollars to receive a LEED® certification. “More
clients in 2011 want their projects to be sustainable and ‘green’ but are less
willing to spend the additional monies for LEED® certification,” says Fred
Bonsall of Bonsall Shafferman Architects and Space Planners of Bethlehem, Penn.
“They are looking for locations with lots of parking with access to major
roadways, parks with good landscaping, and great maintenance, along with
interiors with good windows and daylighting, and HVAC systems.”
Teresa Gallo agrees, “All of our clients discuss LEED and the use of LEED design
concepts but only one in our completed 29 projects asked for the certification –
and the project was awarded LEED Platinum. Clients want efficiency of design and
materials use, along with energy conservation as it impacts life cycle cost”.
Maltese also sees the same trend in Michigan. “Clients are not really interested
in LEED as they were in the past, the cost to pursue it can’t be justified.”
Vacancy Rates Continue to Improve
From the second quarter of this year to the second quarter of 2012, the National
Association of Realtors forecasts vacancy rates to decline 1.0 percentage point
in the office sector, 0.9 point in industrial real estate, 0.5 point in the
retail sector and 1.1 percentage points in the multifamily rental market.
The markets with the lowest office vacancy rates currently are Honolulu and New
York City, each with vacancies below 9 percent.
Office rents are projected to rise 0.3 percent this year and another 4.3 percent
in 2012. In 57 markets tracked, net absorption of office space, which includes
the leasing of new space coming on the market as well as space in existing
properties, is likely to be 26.6 million square feet in 2011.
With the current market conditions and available space the construction industry
should continue to see more activity for tenant build-outs this year and in
1 The SIOR Commercial Real Estate Index, conducted by SIOR
and analyzed by NAR Research, is a diffusion index based on market conditions as
viewed by local SIOR experts. For more information contact Richard Hollander,
SIOR, at 202/449-8200.