Pre-Built VS Tenant Built Office Spaces

Welcome to TentantTips

In our first edition of CRE TenantTips, I want to write about two types of spaces that are becoming increasingly competitive in the real-estate scene. For the purposes of this post, we will focus on the decision to lease office space that is moderately pre-built by the landlord VS. full tenant controlled renovation and build-out.

We will weigh the pros and cons of five categories that ultimately influence the tenant’s decision on choosing the correct type of space. Factors such as the local market, lease terms, and size make each category highly subjective, but recommendation for each will be declared nonetheless.

Disclaimer: Our information is largely gathered from the Washington DC & NYC markets.

 

Background

Prebuilt office space has traditionally been seen as inferior to the custom-built variety. In the past when landlords couldn’t lease pockets of small space, they would prebuild them to quickly increase occupancy and reduce “dead weight” in a building. The build would generally consist of basic carpet, painted drywall, and simple upgrades like a new entry door.

These days, however, prebuilds are becoming far more sophisticated. They are a crucial part of a building’s sales strategy, and the quality is often good enough to attract high-end firms in finance, law, communications and consulting, among many other fields. Small companies that have neither the time, the inclination or the cash to go through the construction process can sign a lease and move right in. [1]

With that in mind, lets dive into the comparison between two as it stands right now.

 

Factor #1: Money

It should be reiterated that lease terms and negotiations will greatly affect the outcome here, but these key points are applicable for most markets.

  • Pre-built spaces carry less risk. Tenant buildouts are notorious for running over budget from hidden costs, delays, and miscommunication- most of this risk is mitigated in a prebuilt space.
  •  Upscale prebuilds are not cheap upfront. Likely an obvious point, but the lease will have to carry a steep premium to cover the landlords cost incurred on finishing the space. However, a landlord can often build a space for 10-20% less than a tenant and pass those savings through.

Winner: Pre-built spaces carry less risk and can be more cost effective for a tenant who doesn’t want to embark on their own buildout.

 

Factor #2: Time

This factor hardly needs supporting points as there really is no comparison. If you need to occupy space quickly, lease a pre-built space.

Winner: Should I repeat myself? This one is a no brainer…

 

Factor # 3: Customization

This is another factor that doesn’t need much explanation. While it is true that landlords are offering much more flexibility and customization to tenants, it doesn’t match the blank canvas that a tenant can get from demoing and building their own space. If the culture in your firm dictates the need for custom architectural elements, brand integration, or custom IT infrastructure- you need to control the build of the space.

Winner: The flexibility offered in a prebuild cannot match a tenant built space.

 

Factor #4: Quality

Besides money, this factor will likely create the most controversy! Let’s discover which type of space offers you the highest build quality.

  • While this can vary vastly, most landlords want the space looking just good enough for you to ink a deal. The simple truth is that most landlords will build the space for as little as possible while giving it just enough wow factor to entice tenants-potentially sacrificing quality in the finer details.
  •  When you control the build, it is at your own pace and demands. A tenant has the option to tightly control quality throughout the construction process when they are in charge.

Winner: When you’re in control, quality is in your hands with a tenant build.

 

Factor # 5: Availability

Ultimately, if you are leasing in a hot market, the luxury of choosing the perfect space can become rudely disrupted by the fast pace and ever changing real-estate scene. However, these points are generally found in most markets.

  • Pre, partial, and existing builds are most common in small spaces. (Think 2-5k SQFT). This helps fulfill the needs of small fast growing operations to be able to quickly move into space, and often don’t require much customization.
  • Large spaces are often raw, or demolished, requiring tenant construction. Due to the risk a landlord would undertake, and the specialized demands of large tenants- these spaces are kept as clean slates.

Winner: This has to a be a draw as it is purely dependent on the size and market you are looking in.

 

Review

A lengthy summary of these points would provide no value as your specific needs will dictate what factor is most relevant to your lease deal. Carefully weigh the characteristics of each type of space, try not to let impulse or external pressure sway your decision. Best of luck to you in your search!

 

Ben Waskey is the senior project executive at Regalmark Inc– a design+build+furnish firm with an integrated team of workplace strategists, architects, and construction professionals.

1212 New York Avenue NW | Suite 520 | Washington DC, 20005 | regalmark.net

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