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Tenant Build-Outs Going Strong

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.

The 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.”

Teresa 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 project.”

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.”

During 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 2012.

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.

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