Commercial real estate has slowed considerably and landlords and tenants are wrestling one another over the costs of tenant improvements. Tenant improvements range from minor additions, or construction to completely redesigning and stylizing a space. Under a better economic situation the landlord usually pays for the tenant improvements and considers it part of the costs of doing business. However in these times landlords don’t have the necessary capital readily available due to high vacancy rates and many renegotiated lower lease terms.
There are two paths a landlord can take with regards to tenant improvements: One, is refusing to pay for tenant improvements at this time, and the second is to willingly negotiate with the tenant and reach an agreement.
The first option of holding out on the tenant improvements seems irrational to many, after all some rent is better than no rent, right? This decision can lead to an unsightly vacant building known as a zombie building. These zombie buildings, if in highly visible areas, can be a real eyesore to any community. The location and submarket also play large factors in whether or not the landlord will be willing to let these buildings sit un-leased. Leaving the space vacant is an option that some landlords are taking because they don’t want to get locked into a low rental rate when rents begin to rise and stabilize again. They are unwilling to tie up capital in tenants that, in this economic environment, might not be there before this recession is over. Some landlords –those who are financially fortunate—are leaving the space empty until conditions improve.
Those landlords who still desire tenants (and income) are negotiating the costs of these improvements. The structure of these negotiations has differed between each deal. Some landlords are discounting the tenants’ rent and asking the tenants to pay for the improvements. Another option is to increase the tenants’ rent and have the landlord pay for the improvements. Either way, the costs are being shared and people are getting creative in how to pay for these necessary improvements for business.
Architects and Interior Designers know that the pressure is on them to do more with less. They are the creative ones being called upon to perform a miracle and deliver style, quality, and functionality on a tight budget. There are several tactics being employed to keep costs down and functionality up. These include: flexible furniture, combining uses, and reusing as much of the floor plan and old furniture as possible.
Having flexible furniture doesn’t indicate the physical dexterity of the furniture but rather its uses and purposes. In today’s work environment employees are gearing away from traditional big offices separated by walls and glass and instead opting for smaller work stations more connected to their coworkers. In this weeks edition of the California Real Estate Journal, Andrew Tarango, tenant improvement manager for San Diego based Smith Consulting Architects, said that many companies are going to smaller work stations that cater to a younger workforce that isn’t necessarily interested in having big, private office spaces. Those employees want a space to touch down in and set up their laptop computers when they need to check e-mail or do other office work alongside shared spaces to meet with co-workers and work collaboratively. It is important that the furniture in these offices is adaptable to the uses or future uses of the work force.
One positive externality that comes from not building larger offices around the perimeter of any office space is the amount of natural light that comes through the windows. This natural light can lower the construction and energy costs of lighting by allowing designers to put in fewer lighting fixtures and skylights.
Architects at Gensler, ranked as the nations top architecture firm two years in a row, has utilized modular custom furniture. This type of furniture not only reduces construction costs on the walls but it allows for more flexible space and use of the furniture. As the companies’ needs change, its furniture arrangement can be transformed to meet those needs.
Gensler has also implemented combining uses as a strategy in many of their recent projects. Combining uses implies that instead of using a space for one specific purpose, the space is used for multiple purposes to cut down on costs and maximize space. For instance law firms traditionally separated the break room from the law library. Now, as a response to employees wanting more shared space and the Internet making most law libraries available online, the break room and law library have been combined into one space. Gensler has had several projects like this where workstations have been put into break rooms or shared space areas to facilitate and accommodate impromptu meetings.
But before any of these improvements even begin, a major cost saving technique will be implemented, reusing as much of the floor plan as possible. It sounds like a simple step; it is a simple step, however sometimes it is completely overlooked. Keeping walls intact can free up more money for upgrades in other areas such as new carpeting or wood floors. Floor plans are not the only thing being reused, furniture and office décor are also being recycled in these tough economic times.
This process piggybacks off of the recycling concept and reminds us that we don’t have to reinvent the wheel. Reupholstering couches and office furniture creates a new look at a cheaper price. This tactic is being exploited by those trying to cut costs and by those who might have fared a little better during the recession, yet prefer not to advertise it.
“We have people who have money but don’t want to announce that they want to spend money,” said Anne Benge, principal in San Diego at furniture dealer and facility services provider UniSource Solutions. It might be harder to justify purchasing brand new office furniture after a round of lay offs. UniSource Solutions provides interior design consulting and has found that some companies that have used their services aren’t driven by monetary principles alone, meaning they aren’t just looking for the cheapest deal.
Due to the amount of layoffs CEO’s, CFO’s and other officers have taken on more responsibility meaning less time for other projects. Obviously public perception is always important to a company’ image so spending wisely and what people see you spending your money on is significant. Spending too much on these improvements could leave your clients wondering if you really have their best interest in mind or if you are more concerned with appearances and office furniture, which is why recycling furniture and other office décor can solve many issues.
Tenant improvements don’t have to be dreaded anymore in down times. If the landlord is willing to negotiate with the tenant on financing the necessary improvements, even in a poor economy the tenant can still create a quality work environment. Flexible furniture, Combining uses, and reusing the existing floor plan, furniture and décor are all creative solutions and can stretch the effectiveness of your budget.
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