Turning empty or outdated interiors into usable office space? That’s getting more expensive thanks to supply chain disruptions, inflation and rising labor costs.
But office owners might have little choice but to spend these extra dollars if they hope to attract new tenants in what has become an extremely competitive office sector.
These are the key takeaways from the 2023 Fit Out Cost Guide for office markets released earlier this month by Cushman & Wakefield.
The report found that although supply chain challenges are easing, many office users are experiencing “sticker shock” as project pricing comes into focus, potentially jeopardizing planned construction projects.
The average fit-out costs — the money it costs to transform either empty or outmoded space into a modern office facility — in the Americas now total $136 a square foot, up 11% from 2022.
The most expensive markets for fit outs, not surprisingly, are clustered around the coasts: San Jose, San Francisco, New York City, Seattle, Sacramento and East Rutherford, New Jersey. The most cost-effective markets for office fit-outs are Latin American cities such as Colombia, Argentina, Peru, Mexico City and Monterrey.
Demand for office fit-outs is also expected to rise, with at least 60% of total office space in the United States having the potential to be considered for a fit-out by landlords and occupiers as they look for ways to attract workers back to the office.
“In the evolving nature of the workplace, it has become clear that quality outperforms,” said Brian Ungles, Project & Development Services for the Americas Lead at Cushman & Wakefield, in a written statement. “A preference for newer, Class-A space has led to stronger rent growth in this segment of the office sector, highlighting to landlords the advantages of repositioning existing assets to better compete with newer inventory.”
Supply chain issues persist
Despite receding supply chain stress indicators, the average lead time for switchgear, one of the most in-demand and constrained construction systems, continues to be significantly delayed, averaging between 12 and 18 months.
The report showed that volatility in commodity costs may be slowing as prices begin to level off. Both copper and lumber have fallen from their pandemic highs, with lumber costs down 12% on a year-over-year basis. Steel prices have also come down from their pandemic highs but to a lesser degree, with year-over-year prices up 1% and quarter-over-quarter prices down 4%. The report warned that although cost increases have decelerated, they are still elevated relative to pre-pandemic levels.
Labor challenges
At the onset of the COVID-19 pandemic, the overall U.S. labor market was tight, with an unemployment rate of 3.5%. The Cushman & Wakefield report says that initially, the pandemic-driven recession led to job losses across most employment sectors, including construction. Most of those jobs, though, were quickly recovered as hiring accelerated. Non-residential construction employment, however, has not recovered the jobs it lost during the pandemic.
Of the more than 47,000 non-residential construction jobs lost because of the pandemic in 2020 through 2021, 37,000 were recovered as of year-end 2022, leaving a 10,000-job deficit from pre-pandemic levels.
The report also noted that increasing interest rates are adding upward pressure to costs and making the lending environment more challenging. But there is less clarity about how these rates will impact costs in 2023 as economic uncertainty in the first quarter has muddled the outlook on additional rate increases.
Cushman & Wakefield added that as occupiers look to upgrade space to attract employees and adopt hybrid work models, the ability to make strategic decisions about the workplace is becoming clearer.
“On a positive note, as occupiers look to upgrade space to attract employees and adopt hybrid work models, the ability to make strategic decisions about the workplace is becoming clearer,” Ungles said in a statement.
