Signature Associates

Construction costs for Detroit area office build-outs soar at ‘unprecedented’ rate

For those looking to build out new office space, it’s going to set you back much more this year than it did last year.

A new report from JLL, a Chicago-based brokerage with an office in Royal Oak, says the cost of constructing new office space in metro Detroit has increased by double digits in each of the nine types considered year-over-year — in some cases more than 25 percent.

Of course, the report is only a guide — office construction, and other types of construction, can be value-engineered to rein in expenses. But across North America, costs have increased 22.9 percent year over year on average. That factors in a 25.4 percent increase in hard costs, 20.8 percent increase in soft costs, 22 percent increase in FF&E (furniture, fixtures and equipment) and a 12 percent increase in tenant factors.

Those increases are being driven by spikes in material costs, supply chain disruptions and labor shortages, the report says — much as they were last year — and now the Russian invasion of Ukraine is further complicating the matter.

“Never in history; it’s unprecedented,” Tim Kay, JLL’s managing director and market leader for Michigan, Ohio and western Pennsylvania, said of rising construction costs.

“Historically, when we were doing budget planning, you would put a 3 percent per year escalator for planning and about three years ago, we started doing 5 percent,” Kay said. “Now, we are opening up bids and start calling estimators for construction firms and they say they are planning for projects that are a year out with 2.5 percent increases per quarter, which is 10 percent per year, which equates to like two times what we were doing.”

In general, the more open space, the cheaper it is to build.

What’s dubbed a “progressive” office has no enclosed offices but lots of collaborative and conference spaces. A “moderate” office has 10 percent of its floorplan dedicated to enclosed offices, while the remaining space is used for collaborative and conference spaces. And a “traditional” office has 30 percent enclosed office space and 70 percent for collaborative and conference spaces.

Progressive office space in metro Detroit ranges from $191.44 per square foot to $254.02, based on quality and complexity, according to the JLL report. Those are up across the board from $154.91 to $225.19 last year. However, the region is still slightly below the U.S. and Canadian average of $194 to $257 per square foot.

Moderate office space ranges from $203.12 per square foot to $272.22 per square foot, up from $159.11 to $232.55 per square foot. Again, however, the region this year is lower than the average in the U.S. and Canada, which are $205 to $275 per square foot.

And for traditional office space, you’ll pay $209.36 per square foot to $286.61 per square foot, up from $168.15 per square foot to $243.07 per square foot in 2021. Yet again, that’s lower than the U.S. and Canadian averages of $212 to $290 per square foot.

JLL says it crunches the data based on more than 2,900 construction projects it managed for more than 500 clients in 52 markets.

Kay said he anticipates seeing a leveling off of construction costs in the first quarter next year, but some things — such as higher wages, for example — are likely here to say.

“Like many business sectors, increased base labor rates and enhanced benefits have been required to attract workers,” Kay said. “We do not anticipate labor rates going down. The industry will continue to drive innovation in construction methods to bring new efficiencies in labor. For example, pre-fabrication and easy to install materials will bring labor costs down over time.”

The increases, he said, lead him to worry about development projects no longer penciling out financially and being put on hold, temporarily or indefinitely.

“This is absolutely unprecedented,” he said.

Posted By: Crain’s Detroit Business on May 20, 2022.  For more information, please click here to read the source article.

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