It’s a competitive environment out there in San Diego right now, and there is a sense of urgency for owners to make a deal on their available property. “[Tenant’s market conditions] can occur when vacancy rates rise in a certain area and landlords must provide their current and future tenants with incentives that they wouldn’t normally provide in order to retain and attract tenants for their buildings,” (Martz). Owners may have to make more concessions, and spend more money, in order to do so. This could show up in any number of ways: landlord undertaking of responsibility for existing building conditions or landlord funding of tenant improvements and/or build-outs. “Whether it is a tenant renewal and a tenant is improving a space or they are relocating, [construction teams] are pretty busy right now,” (Gonzalez).
These scenarios are growing increasingly common and expensive for owners. “As the economy heats up, demand for construction services to deliver a quality space grows as well,” says Robert Garey, a Senior Director at Cushman & Wakefield, of the recent trend in rising construction costs (Richardson). There is an understandable temptation to commit to huge capital improvements in an effort to compete for tenants, but it doesn’t do anyone any good overall to write a bad, lopsided deal. The best outcome for owners in the current market is the most even-handed negotiation possible, resulting in a win-win deal for everyone involved. This can be achieved with a collaborative analysis of improvement costs early in a negotiation.
So how do you do that?
Enlist your design-build general contractor or architect in generating construction drawings (CDs) in support of early budgetary bidding. To step into CDs and architectural drawings, even abbreviated ones, may feel premature before a lease or sale is even complete. However, the information yielded can be the difference of 30-40% of construction costs. It also offers an early opportunity for value engineering that can influence the conditions and concessions of a deal before the transaction is complete. And we’re not just talking about a floor plan, but a more comprehensive look. 10-20 pages of drawings are needed to detail the the major cost categories like MEP, Structural, and ADA.
Consider that a $2-10k investment in early architectural planning services could yield victory for both sides, allow real-time and accurate market information for pricing, and save money in the long run. Unnecessary costs incurred by landlord and tenant can be avoided. Contact APS for additional guidance in this arena, and let us be your resource during the due diligence phase of your San Diego commercial property deal!
APSGC: Engaging a General Contractor During Due Diligence (And the First 5 Things to Assess)
Article: Rising Construction Costs Pinch SoCal Development And Tenant Improvements Travis Gonzalez
Article: Is the Central Business District Becoming a Tenant’s Market? Andrew Martz
Article: Real Estate: SoCal Markets Remain Hot, Experts Say Brandon Richardson
