Dissecting Tenant Improvement Costs

Determining a benchmark for tenant improvements cost is important, but pegging the right number is challenging. A new report from Cushman & Wakefield looks deeply into cost trends for tenant build-outs, and finds that they can vary significantly depending on the market and the details of the project, including layout, furniture and finishes.

The report looked at 39 US and Canadian markets, and found that build-outs can have a construction cost range of $70 to $200 per square foot for a first-generation build-out. Tenant build-outs are the most expensive in New York and San Francisco, while Baltimore has the lowest pricing. Second-generation costs are lower, ranging from $47 per square foot to $165 per square foot. Baltimore once again is at the low end of the scale, while San Jose has the highest costs.

Isolating for primary US markets, the range is narrower. On average, tenants can expect to pay an average of $150 per square foot for a first-generation build-out, while tenants pay $112 per square foot for a second-generation build-out. When isolating US regions, the Western markets are the most expensive, costing an average of $131 per square foot for first-generation build-outs and $99 per square foot for second generation build-outs. First-generation costs are lowest in the Southeast at $80 per square foot, while second-generation costs are the lowest in the Southwest at $70 per square foot.

The report also looked at individual expenses. Mechanical, electrical and plumbing are the largest expenditures, accounting for 40% to 45% of the total project cost on a first-generation build-out. In Boston and Seattle, these costs account for more than half of the total project cost at 58% and 56%, respectively. Minneapolis was the least expensive market for these systems, accounting for only a third of the total project cost.

Carpentry and walls is the second largest expensive, costing approximately 25% of the total project cost nationally.

Overall, construction costs are on the rise. According to recent research from JLL, virtually all costs associated with construction will increase in 2021 as labor costs tick up between 2% and 5% and materials costs and volatility remain elevated. Total construction costs increased from between 3.5 to 5.5% every year from 2012 to 2019, per historical data, and JLL expects 2021 to bounce back to be within that range.