2019 U.S. office construction costs were on the rise, according to the Fourth Quarter 2019 North America Quarterly Construction Cost Report by Rider Levett Bucknall. Cities that showed the largest increases in year-over-year construction costs include Seattle at 6.20%, Chicago at 6.29%, and San Francisco at 7.79%.
Hard construction costs for office buildings in New York City varied between $300 and $600 per square foot of gross floor area; in San Francisco the hard cost was as much as $525 per square foot; while the Denver office market boasted a relatively more affordable office construction cost, ranging between $165 and $260 per square foot.
In this article we look at some of the factors contributing to the cost of building office property, as well as what the average office construction costs are today.
Factors Affecting Office Construction Costs
Variables that affect the price of commercial office construction across the U.S. include:
- Location and region
- Type of structure and design
- Size of building
- Building code requirements
- Standards and features
- Quality and grade of materials used
- General labor costs
- Construction unemployment rate
- General contractor experience and fees
Both the primary and the secondary uses of the office building being constructed have a significant impact on the construction cost. For example, a large corporate headquarters office in a top 10 office market like Manhattan will cost more to build than a small corporate office in a secondary suburban market such as Georgetown, Texas.
Construction costs also vary between properties that are exclusively white-collar office use, and those that also incorporate retail spaces or units that can house dining tenants. Construction grade and requirements also vary from basic office space to medical office space – these variations influence how much it costs to build the space.
Average Office Construction Costs by Market
Cumming Corp. is one of the leading multi-faceted project management and cost consulting firms in the country, with 30 offices worldwide. Recently, the firm took an in-depth look at construction costs per square foot in the United States. The research presents 2019 costs per square foot of gross floor area for all property type buildings completed within the city limits of major markets. The list presents a good starting point estimation, without factoring in the cost of acquiring developable land in the city business district, site work, unique site conditions, building fees and permits, and other soft costs.
The largest office construction costs are on the East coast—reaching $1,026 per square foot for office high-rises in New York City, and on the West coast, where San Francisco office space construction costs rise just above the $1,000 per square foot mark. Cumming Corp. research also finds Denver office space to be the lowest-cost build, with office property construction costs ranging between $135 per square foot for single-story office buildings, and $485 per square foot of high-rise office buildings.
Office Construction vs. Office Build-Out
Construction of an office building is only part of the job. After completion of the shell, the office space itself still needs to be built-out. Also known as TIs or tenant improvements, office build-outs may include items such as interior walls and doors, private bathrooms, ductwork, electrical and plumbing, light fixtures, flooring, and painting.
Who pays for building out the office space?
The party picking up the tab for the office build-out depends on how the commercial office lease is negotiated, as well as on the demand for office space in the market. Sometimes the landlord pays for building-out the office space, and other times the tenant does the work at its expense in exchange for a rent abatement (also known as free rent). Alternatively, build-out costs can be split between the landlord and tenant.
Though this does not dictate a particular outcome of such arrangements, there are observable trends in tenant improvement allowances depending on vacancy in the market. When office vacancy is high, tenants may have more leverage in obtaining more significant rent abatements, or having the landlord take care of tenant improvements, whereas when vacancy is low and prospective tenants may not have many options from which to choose, it is the landlords that have the higher ground.
How office floor plan affects build-out costs
The 2019 Office Cost Benchmarking Report by JLL notes that the average cost of building-out office space increased by 12% in 2018. The firm divides office build-out into three categories:
- Progressive: open office floor plan with no enclosed offices, intended for a highly collaborative environment.
- Moderate: small workspaces, 10% enclosed offices, and a mix of conference rooms and collaborative spaces with an “agile” floor plan.
- Traditional: large workspaces, 30% enclosed offices, numerous conference rooms and one collaborative space.
In addition to these three office build-out categories, JLL includes a pricing breakdown for each floor plan style:
- Base: low budget and focused on function, with basic technology and aesthetics.
- Medium: average materials with upgraded lighting and design.
- High: top-quality materials and finishes with a focus on aesthetics and detail.
Average costs of office space build-out:
- Progressive: $147 to $167 per rentable square foot
- Medium: $170 to $196 per rentable square foot
- Traditional: $193 to $224 per rentable square foot
Miscellaneous office build-out costs:
- Executive office space: $96 to $157 per square foot
- Fitness facility: $155 to $210 per square foot
- Conference center: $150 to $205 per square foot
- Employee dining and kitchen: $162 to $241 per square foot
- Office furniture: $28 to $80 per square foot
Average office construction costs can vary widely depending on what market you’re building in. Factors that affect the cost of constructing office space include building code and zoning requirements, quality and grade of materials used, and general labor costs.
After an office building is constructed, the interior space still needs to be built out for a tenant. Build-out or TIs costs also vary greatly depending on the type of interior office floor plan used. Office build-out costs don’t include items such as furniture and fixtures, or special-use spaces such as conference and fitness space, or employee dining.