Tenants find cost of improvements daunting

It's getting expensive for tenants to move into new office space in northern Nevada, and some companies are deciding to stay put rather than relocate.

Tenant improvement projects that once cost $35 a square foot now run as high as $75 maybe more if the tenant wants something fancy.

And landlords haven't been in a hurry to increase their allowances to tenants to finish out offices.

"This is creating great angst among tenants looking to lease space," says Tim Ruffin, vice president of the office properties group at Colliers International in Reno."Costs appear to be rising faster than our office prices."

And Don Welsh, who leases office space for Trammell Crow Co.

in Reno, says the cost of improvements is beginning to hamper leasing activity in new buildings.Owners of existing office buildings, however, may benefit.

"It's affected at least a half dozen of my deals this year,"Welsh says.

The immediate push for the rapid price increase has been higher costs for construction materials.

The steel used in everything from joists to junction boxes climbed sharply in price last year.Wholesalers were raising the price of nails and screws by about 5 percent last month.

The cost of drywall is moving up as well.

But a more significant trend over several years has been the amount of work that's involved in tenant improvement projects, says Kevin Weiske of Moody-Weiske Contractors, a Reno company that specializes in finishing space for tenants.

It's not uncommon these days for developers of new structures to lease a bare shell four walls and a roof that requires tenants to install everything from the concrete floor to rest rooms to the heating and air conditioning units on the roof.

In fact, some new retail projects now include only three walls, and the tenant pays for his own storefront.

"It's a very different market out there," Weiske says."It's developers driving the cost of tenant improvements."

And some tenants who don't get good advice during negotiations, he says, find themselves paying rent on the building for four months or more while the improvements are planned and completed.

Yet another factor contributing to the pressure on prices, Ruffin says, is the pace of construction activity throughout the region.

Strong demand for subcontractors for everything from residential subdivisions to new industrial projects keeps pressure on bid prices.

Ken Stark, president of Stark & Associates Commercial Real Estate, tells the story of opening a recent contractor's proposal to finish a small office for a physician.

The proposal: $150 a square foot.

"I said,'He's not too interested in this job,'" Stark says."Unless it's a big job, they're not motivated."

And in some cases,Weiske says, tenants' desire for greater amenities is pushing prices up.

It's not unusual, for instance, for upper-end offices these days to include several climate zones with individual temperature controls and that's a costly improvement.

No matter what the reason for higher prices for tenant improvements, it's tenants rather than landlords who are footing the bill.

Some landlords have modestly increased their allowances for tenant improvements, but most don't feel the need to give away cash in a market where office vacancies are running at a healthy 13 percent.

For a company looking to lease 5,000 square feet of office space, a $10 increase in the per-foot cost of tenant improvements becomes an expense of $50,000.And that,Ruffin says, is enough to convince some executives that they don't need to move into new quarters.

Stark says his firm has seen some smaller deals fall apart because improvement costs won't pencil out for tenants.

At the bare minimum, both Ruffin and Welsh say they've seen resurgent interest in second-generation office space space vacated by a tenant who already made the big investment in floors,walls, bathrooms and other improvements.

And Wieske says the rising cost of improvements means that more potential tenants are getting contractors involved early in their negotiations instead of waiting for a surprise after they've signed a lease.