Office Tenant Improvement Costs are Skyrocketing

Commercial real estate tenant improvements (TIs) have always cost a lot, but you would think that with the real estate market as a whole slowly marching back from the worst overall recession since the 1970s that some discounts would be available. This has not proven to be the case at all; in fact, costs for TIs requested by new tenants has taken a significant upturn during the first two quarters of 2011. What is driving this trend?

Misconception Regarding
Labor Costs: One matter that causes people to think TIs should be flat or decreasing in cost is the fact that the commercial and private real estate markets went flat or, in some areas, sank into chaos. Unfortunately, the price or availability of real estate has nothing to do with the cost of workers that must be hired in order to perform tenant-requested modifications to a commercial real property. While there are plenty of workers available, the minimum wage for even menial tasks has risen and the cost of skilled labor has remained the same or increased due to average wages in a given market. In no case has the cost of construction labor, especially skilled labor, been reduced by the economy. A fair wage remains a fair wage and when a licensed contractor is required to perform work, that contractor requires a labor payment sufficient to cover his or her own pay as well as those people who must be hired to perform the tasks involved in the upgrade. As has always been the care, the more education, licensing, insurance, bonding, and other requirements that must be met by a legally operating skilled labor contractor, the higher the costs passed on to the property owner and, in the end, to the tenant paying for TIs.

Cost of Material Increases: As the economy rebounds, it seems that inflation is sneaking its ugly nose into everything everywhere. Even though salaries may not be increasing, costs are definitely on the rise. Donald Miller, a Central Texas contractor stated, “My cost for steel studs and related materials (used in TIs) have almost doubled during the first quarter of 2011. I’m not sure what caused this jump, maybe it is inflation, but I still have to pay the higher prices when I purchase materials to do my work.” Miller, like all other contractors,
has no control over the cost of materials that must be included in job bids for TI work or any other type of work and it is only because all contractors are faced with this same increase that bids remain competitive. It isn’t just Central Texas that is facing these increases. Kenny Thompson of Thompson Concrete Construction, a Central Florida contractor, states, “I have to purchase lumber and steel for my jobs and I’ve noticed a sharp increase in the materials for what jobs that are available for RFP in the area in the last few months.” This impacts new commercial real estate, residential, and TIs – all phases of the real estate market and makes costs inch up.

Reverse Impacts of Poor Economy: Two years ago when the economy in the U.S. took a huge hit, many manufacturers of materials used in TI construction work had to lay off employees and reduce their inventory to bare-bones levels. Some companies had to close their doors completely, leaving holes in the manufacturing of some areas and resulting in shipping costs to move materials from regions still producing or having on-hand inventory. This means that premium prices are required by the construction supply companies because of reduced inventory on hand or higher shipping costs being rolled into the price of materials.

So while the “reasonable” person would expect TI cost to be lower, reality is quite the opposite.

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Bryan E. Cole | Team Leader
NAI Keystone Commercial & Industrial, LLC
direct: 610-370-8502
Bcole@naikeystone.com

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NAI Keystone is a full service commercial and industrial real estate firm located in Reading PA; We handle buyer, tenant, and landlord representation throughout Pennsylvania and with the association of our global partners we can assist in locating product throughout the country.

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