Prebuilt vs. Buildout?

Whether you're a startup signing your first office lease or an established business expanding to a new location, one of the first questions you need to ask is whether to move into a prebuilt office or design your own workspace.

Your choice will depend on timing, your budget, the size of the space, and your specific requirements. Here are some of the pros and cons for both choices.

Move into a Prebuilt Space

Prebuilt office space is furnished, wired, and ready to go, so you can sign your lease and move right in. In the past, prebuilt space was considered inferior to a buildout—landlords often slapped on new paint and carpeting and a did few minor upgrades before re-leasing the space. Today's prebuilds go much farther, offering amenities like collaboration rooms and pantries to attract tenants.

For landlords, an impressive prebuild helps them stand out. They can lease their space faster and charge a premium for it. Plus, they don't have to offer tenants free rent during the construction phase.

For tenants, a prebuilt space allows them to avoid the delays and hassles of construction. Entrepreneurs are often anxious to get started, and an established business may want to tap into a new market while it's hot.

Prebuilt offices are also easier on the tenant's pocketbook. Landlords, especially if they own several buildings, have clout and pricing power, and can often create a new space for 10 to 20% less than a tenant could.

In addition, buildouts often lead to change orders, cost overruns, and delays. Since a tenant has an agreement with the current landlord about a move-out date, a delay needs to be negotiated, often with a tight budget under fraught circumstances.

For tenants who want 2,000 to 5,000 square feet of space and don't need a lot of customization, prebuilt space is often the easiest, most affordable option.

Do a Buildout

Buildouts are more complex, but for large offices or specialty uses like a medical or dental office, they may be the best choice. Few landlords want to take on the responsibility of designing a 20,000-square-foot layout for someone else or ordering specialized equipment.

The construction work for a buildout may be done by the landlord (a turnkey buildout) or by the tenant (a tenant improvement).

In a turnkey buildout, the landlord and tenant discuss the extent of renovations, as during lease negotiations. After they come to an agreement, the landlord hires and manages contractors to do the work, though the tenant is usually allowed to make cosmetic choices about things like paint color or carpet design.

A turnkey buildout allows tenants to focus on running their business while the landlord deals with the risks and headaches of construction. But it also gives tenants less choice about their surroundings. A landlord is typically most concerned about costs, whereas a tenant may focus more on quality.

With a tenant improvement buildout, as with a turnkey, the tenant and landlord negotiate the renovations to be done in advance. Then the tenant, not the landlord, selects the architect and engineer, determines all specifications for the building and furnishings, and reviews weekly progress reports.

The length of time for a buildout depends on its scope, but in general, you should allow at least four months for the design process, one month for selecting bids, and four months for construction.

Buildout Cost

Buildout cost varies widely depending on location, the age of the building, whether labor is unionized, and demand. Not surprisingly costs are highest in New York City and Silicon Valley, where space is at a premium.

Beyond these factors, costs are largely determined by the layout you choose. Commercial real estate firm JLL recently published a benchmarking guide for buildout costs.

For an open floor plan and conference rooms, the average cost is $152.23 per square foot. For the most popular type of plan—about 10% enclosed offices and the rest open workspaces, conference rooms, and collaboration spaces—the average cost is $158.23 per square foot. For a traditional layout, in which about 40% of offices are enclosed, the average cost is $177.06 per square foot.

There are many factors involved in deciding whether to go with a prebuilt space or do a buildout, and you should give yourself plenty of lead time in making a selection. Find your space, calculate your budget, and start talking to the landlord to work out an acceptable deal.