While COVID-19 sparked market fluctuations and vacancies across asset classes, construction is still commencing locally across industrial, multifamily and many other markets. Office and retail leases are moving forward, albeit slower with often shorter lease terms. As a result, the CRE industry is thinking creatively to get leases signed and the influx of vacancies filled. Tenants on the other hand are pushing for more accurate, holistic pricing per building while trying to better leverage TI allowances and minimize financial risk.
One catch-all solution has been design-build – a project delivery method in which the design and construction services are contracted by a single entity known as the design–builder. CRE brokers are making the design-builder their second call after a tenant expresses interest in acquiring space or there is a vacancy. Although design-build is not new, the reliance on a trusted partner earlier in the commercial real estate process is gaining traction to maximize deal efficiency.
Here are five reasons why:
When designing a floor plan, mechanical, engineering and plumbing (MEP) is often overlooked and not understood by the builder. Thus, large contingencies are called out. A true design-builder will analyze these systems much earlier in the process to ensure it is accounted for accurately in initial pricing exercises. This is important, as typically, MEP systems account for a significant portion of the overall construction cost. The design-build team can find creative MEP solutions that maximize the dollars being allocated towards design aesthetic. Dollarizing decisions helps manage budget expectations and the client’s vision.
BENEFIT: Tenant brokers can refine their search and provide space options that will more readily suit a client’s budget, vision and ideal lease terms. Landlord brokers are better equipped to propose solutions centered on the TI allowance and how the floor plan can easily fit in that space.
Now that the tenant’s dream floor plan is solidified, a design-builder can also provide a cost for the floor plan in each building option. This is an important next step as each building’s unique parameters can have a drastic impact. For example, existing MEP infrastructure and location of these systems will weigh heavily on overall cost, especially if needing to run underground plumbing, move electrical rooms, or tie to an existing HVAC system. A design-builder can complete a comprehensive analysis of each building’s construction costs and combine it with other parameters, like a TI allowance, for a more holistic picture in terms of budget.
BENEFIT: Tenant brokers can provide clients with an apples-to-apples comparison, reviewing the dream floor plan and how it sits in each building compared with the overall benefits of that location. The client is then equipped with a more realistic all-in number to better manage cash flow and financing. A design-builder will analyze the landlord’s proposed work letters to ensure their leverage points are maximized in the lease, as well as educate the project team beforehand to prevent costly future scope changes.
Once a building is chosen, a design-builder can take it a step further and provide good/better/best options. Their in-house architecture team can then finish designing to a budget versus value engineer once the design is complete. This is often the case when a general contractor (GC) is brought on later in the process. Typically, an estimate is given based on finished drawings. In this scenario, the cost of construction is often higher than the budget allocated, forcing the client to go back to the architect and remove certain design aspects. This slows down the process for the client, adds to overall cost for drawing changes and delays occupancy for the landlord and tenant brokers.
BENEFIT TO CRE: Having architectural, MEP design and construction all under one roof ensures nothing is missed. It provides a clearer picture because there are fewer drawing changes and further manages tenant expectations.
Next, the design-builder will create a detailed scope letter explaining what each party is receiving, which can be used in lease negotiations. Once the scope is agreed upon, the construction contract can be signed prior to design drawings being completed. At that point, the design-builder takes on 100% of the overall cost and schedule risk. This eliminates finger-pointing between the owner, broker, architect, project manager and engineers. Committing to a budget upfront also puts both the broker and client at ease.
BENEFIT TO CRE: By transferring risk to the design-builder, clients have more schedule and budget certainty. This leads to faster, more informed decisions. The landlord and tenant broker also benefit from relinquishing project cost and schedule risk after the lease is executed.
Having a design-builder involved earlier in the process eliminates the need to have fully complete drawings before fully bidding out to general contractors. The entire project team is assembled and construction can commence to meet the proposed schedule. Another benefit of early involvement is the design-builder can assist with tenant and landlord coordination by communicating the entire scope of work to the building engineer, vendors and team while design is being completed.
BENEFIT TO CRE: Faster occupancy means quicker revenue and a happier tenant. Simple as that.
Andrew Glover and Drew Gavic lead ARCO/Murray’s Minneapolis office. ARCO/Murray is a single source national design-builder that specializes in commercial construction and real estate needs for Fortune 500 companies and individual businesses.