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September 16, 2020

The first thing you want to determine is the type of commercial office space that you need to develop. There are 3 principal types of office spaces to develop:

  1. Basic office space
  2. Mid-range office space
  3. Executive office space

Naturally, these spaces carry different types of costs…

A basic office space will be more affordable than an executive office space, but you may need to develop executive space for your commercial building. Location also plays an important role. The cost per square foot will be higher in some markets than others, as outlined in this helpful article.

You can use this calculator provided by BuildingJournal to do a quick compare and contrast on different types of developments to get an accurate picture of how much office space you need.

Commercial Office Space

Basic office space

This type of space is best suited for very small, start-up-like companies. These businesses tend to have 1-20 employees and, therefore, don’t require a ton of space to make a healthy working environment. If you’re developing a building designed for smaller companies, you can anticipate a more affordable average commercial construction cost per square foot.

Mid-range office space

Mid-range office spaces are for mid-size companies with 100 or more employees. More room is required than basic office spaces, which require larger commercial real estate. They also require meeting spaces and often have private offices for the founders or C-suite leaders. Factor those variables into your budget to calculate the cost per square foot.

Executive office space

Executive office spaces are for the large corporations that have upwards of 1,000 or more employees. These companies often require multiple floors of real estate space with many different meeting rooms and private offices stationed throughout their suites. If your building will house several large corporations, expect to develop more lucrative office environments and expect the cost to construct them to go up.

commercial office lobby

Other operating costs

In addition to forecasting the construction costs for the office space, you need to account for ongoing operating costs for each tenant. Operating costs are net expenses to maintain an office environment and ensure it continues to uphold appropriate building codes.

There’s a great guide on commercial real estate operating expenses that details the cost borne by both the tenants and the landlord of a commercial building. Here’s a quick rundown of some of the most common operating costs to consider.

Office furniture

Some tenants will have their own furniture to bring into the space. For those that don’t, as the owner of a commercial building, you need to provide appropriate office furniture. Supportive office chairs could cost $350 apiece while desks could cost up to $5,000. Calculate the number of estimated employees and factor in delivery costs to shape your budget appropriately.

Windows

Commercial windows – and doors, for that matter – are more expensive than residential windows. Commercial space is prone to significant swings in temperature, requiring vinyl materials, aluminum frames, aesthetic designs, and energy efficiencies. Make sure you fully inform yourself about the difference between commercial and residential windows when developing your building.

Foundation

Foundation is one of your most expensive costs. Most commercial buildings are built on solid foundations of concrete, and concrete costs $113 per cubic yard. Multiply that by the square footage of your building and you can tally up the cost.

Flooring

Flooring costs range between $3.00 and up to $20.00 per square foot. But commercial flooring requires more expensive equipment to install than residential flooring, which you’ll need to factor into your budget.

commercial Space with yellow chairs

Hard costs vs. soft costs

On top of calculating the office space and operating costs, you’ll also want to forecast how much you’ll spend on maintenance and administrative costs. These are your hard and soft costs that will require constant vigilance to ensure the building is up to code.

Examples of hard costs

Your hard costs are the maintenance costs that are used to upkeep the state of the building and customize the interior for different tenants. These include painting costs, fire alarm installations, sprinkler systems, drywall, framing, electrical wiring, plumbing, and other installation costs.

You can expect many of these costs to become ongoing expenses as the building is put to use over time. This will be an important part of your overall commercial building budget.

Examples of soft costs

Your soft costs are the administrative costs involved with constructing the commercial building. These include your building permits, lawyer fees, planning, and inspection costs that will dictate when and how your building is approved to open for business. Some of these costs will be recurring costs that require renewals to keep the building up to code so keep track of all of the key dates so you don’t run into any trouble down the road.

Luxury Commercial Office

Payment options of commercial construction

Once you negotiate with tenants to move into the building, you’ll want to recalculate the value of the development. You want to take the average commercial building construction cost per square foot that you, as the building owner, paid for the development, and increase the value per square foot when leasing out to prospective tenants. Rent, building standard allowances, and other revenue generating tools can earn significant ROI on your construction costs.

Discounted rent

Sometimes, tenants may negotiate a lower cost per square foot when agreeing to lease out space in your building. There are a handful of guides on how to negotiate commercial leases that building owners can use to reach an understanding with tenants. Make sure the agreed upon rental rate is a happy medium between your ideal rate and what the tenant deems fair.

Building standard allowance

You’ll also want to allocate funds for a building standard allowance or a turnkey office build-out payment. This is money that building owners will provide tenants for the cost of moving into a new space, or to make improvements to the interior space of the building.

Final thoughts

As you can see, calculating the average commercial building construction cost per square foot is a multi-step endeavour. There are a lot of costs indirectly related to the construction of the building that must be included when calculating the true value of your building.