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New Commercial Building & Pre-Leasing - $50 Per Foot Finish-out?

1,637 Views | 12 Replies | Last: 2 yr ago by evan_aggie
evan_aggie
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AG
Curious if there are any other Ags on here involved in retail centers or commercial leases.

My father and I (+1 business partner) bought some land with the intent to build (2) 10,000 retail centers in a nice area with lots of homes around. There is strong interest and the commercial leasing company thinks we can pre-lease the first 10,000 ft building, but they are recommending a finish-out of $50/ft now.

What's crazy is this was $20-30/ft in the past, and you can imagine: $500,000 for finish out vs $250,000 makes a big difference in what $/ft rent will need to be charged. Moreover, building costs have gone up as with residential, making the per ft construction really high.

Just curious if anyone knows whether this $50/ft is standard affair for the San Antonio area?

This would be "MY" first entry into retail, but my family has a few already where building costs were < $100/ft and finish-out only needed $20/ft.
FTAco07
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AG
I will caveat that I don't know specifically what you're building out, but that honestly seems light to me. If it's a restaurant tenant it's going to be more. For what it's worth office buildout improvements are running more like $100-$150 PSF depending on size and quality. No direct experience in retail, but there's no way you could do much of anything for less than $50 PSF.
Spaceship
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AG
FTAco07 said:

I will caveat that I don't know specifically what you're building out, but that honestly seems light to me. If it's a restaurant tenant it's going to be more. For what it's worth office buildout improvements are running more like $100-$150 PSF depending on size and quality. No direct experience in retail, but there's no way you could do much of anything for less than $50 PSF.

I agree - retail finish out for smallish size suites sure seems like higher than $50/sf to me.
birdman
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Why not build the first one and see how things go?

If it rents quickly and the math works out, use cash flow to help pay for second building. If the investment wasn't as rosy as you hoped, your construction bill is half.
TxAG#2011
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You mean a TI allowance of $50/sf?

Sounds high for a retail center yea
agcrock2005
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AG
A lot of the finish-out TI price would depend on the end user. Cell phone place much less than restaurant for example. This is all spec or you have some tenants in tow? Also depends a lot on if you're in Alamo Heights versus Bulverde. I work in CRE in D/FW and I've reviewed thousands of leases and I've seen anywhere from $15/SF to $200.
aggieland09
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AG
Isn't the TI allowance 6 one way or half a dozen the other? Don't you adjust the monthly rent price based on how much money the leasee needs up front to finish out the space? This basically reduces the amount of cash they need up front to move in.
ATX_AG_08
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AG
I'm a real-estate manager for a national retailer and negotiate this on a daily basis. We require our landlords deliver a space demised with Sheetrock, facade with glass and doors in place, and with utilities brought to our designated point of connection. We will take it from there and our buildout is usually abt $32.32/SF, which comes out to about $350k for our typical sized space (10,000 sf). I usually ask the landlord for $100k in tenant allowance as a starting point, but it's all negotiable with rent being the other main factor. Like others have said, something like a restaurant would be much higher, but I'd try to put it on the end user and not eat the entire cost.

Edit: these are pre increase figures. Right now things are of course higher.
evan_aggie
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AG
Thanks for all of the responses!

Yes, sorry for not being clear: we're not targeting restaurants for tenants. Only thing might be a sandwich or pizza shop. I think we'd be okay $50/ft finish-out on a 10 year lease, especially medical.

Also confirming: yes, we'd build 1 10,000 ft strip first and then make sure that is 80-90%+ before going into the second. But I should say the economy of scale on the land we have suggests we should make use of the rest of the space. Site work is going to be high for the entire tract and it doesn't make sense to do part 1 and then part 2.

$32-33 seems more inline with what I'd expect, honestly. I guess my father just got hit with a tough dose of reality seeing that he was able to build a tilt-wall for $90/ft a few years back and finish-out of $20-$25 and now we're looking at $160/ft+ $40-50/ft finish out +.


Quote:

Isn't the TI allowance 6 one way or half a dozen the other? Don't you adjust the monthly rent price based on how much money the leasee needs up front to finish out the space? This basically reduces the amount of cash they need up front to move in.


Yes/No. It doesn't always work that way if you have an A location vs AAA vs B- location. Let's say just a few years ago a 10,000 ft building can be built for $900,000+$250,000 in FO for $1.15M total. Now builders say $1.6M+$500,000 = $2.4M. We'd have to expect much higher rent per ft to make it all work out. An area may or may not support the needed cost. So sure, your goal can be to pass on the higher costs to the tenant via $/ft rent, but maybe it's not a $38/ft location and really more like $30/ft.
WestTexasAg
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AG
$50 psf TI Allowance sure sounds like it is on the high end, but it seems to be more common these days.

My thought would be put in the $50 psf TI to get one or two strong tenants. The finish out allowance on the remaining spaces may not be as high since you have a couple of strong tenants in place that others will want as co-tenants.
Sub4
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AG
$50/sf sounds high for retail, probably closer to $35/sf Is more normal. At the very minimum don't advertise $50/SF out of the gate, otherwise, you're just asking people to ask for more.
COSciAG
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$50/SF for retail may have been high a few years ago but it does not seem crazy now with the price increase for materials. Literally EVERYTHING material wise is going up in price.
SLF11
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AG
Prelease 10k SF of retail right now? Very tough market right now(better for neighborhood centers as opposed to big box power centers.)
I'm guessing 1200-2000 SF bay sizes?
What are NNN rents underwritten at?

$50/SF is very high, unless you have $30/SF/YR+ NNN rents, 7-10 year lease terms, a desirable use AND high quality credit.

FWIW, I'm an office landlord broker in SA, who has a little experience in neighborhood strip centers.


evan_aggie
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AG
Yes, 60x20. Not sure of the NNN underwritten question.

I am not running point, just learning/kept abreast of meetings with the new commercial management company that apparently bought the old one out.

They came in suggesting $50/ft which I think surprised us....but as you said, could just be a sign of the uncertainty right now.

It's a desirable location north of 1604, east of 281. Demographics are strong but not a hard corner. If we get a reasonable offer per ft we may decide to sell to some investors with much deeper pockets.
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