Supply chain and labor shortages are delaying commercial build-out and tenant improvement projects by an average of three months.
Commercial build-out and tenant improvement projects are taking significantly longer due to supply chain and labor shortages. On average, these projects, which are typically six months on average, are now taking three months longer to complete, complicating landlord-tenant agreements on the construction project and commencement of the rent.
“Every deal is a rush right now because companies need to order materials as soon as possible,” Russ Arouh, co-chair of the industrial and warehouse industry team at Arnall Golden Gregory, tells GlobeSt.com, explaining that the delay is true for both industrial and office properties. He estimates that there is typically three months of additional delay, but can depend largely on the type of project and whether there is a relocation that requires no downtime.
The widespread delays have complicated the negotiation process as tenants look for some relief from potential delays. “Cautious occupants are negotiating a longer build-out period. If a tenant usually needs 120 days to 150 days to build out, now they need 150 to 180 days to build out. Tenants are also trying to negotiate for some form of rent abatement, and they are subjecting the build out to a robust force majeure clause, which includes things like supply chain disruption, lack of materials and labor shortages,” says Arouh.
Initially, landlords have pushed back against these suggestions, but tenants that are willing to share the risk are much more successful. In this scenario, the landlord might be more flexible on terms if it shares in the build out process. ““More often now, I am seeing that the landlord will do the build out work and the tenant will take occupancy 30 days pre-commencement to complete the final build out,” says Arouh. “Then, landlord is able to maintain control. If the landlord can complete the build-out sooner, then the tenant will take occupancy sooner. And the landlord becomes more amenable to the force majeure clause because the clause is benefiting them as opposed to only benefitting the tenant.”
However, landlords aren’t solely taking on responsibility for the build-out either. There are three build-out models emerging as a result of the shortages and delays in materials. “I am seeing work that is being done at the landlords’ expense; work that the landlord is doing as some sort of improvement allowance; and then work that the tenant is doing on their own,” says Arouh.
While the pandemic exacerbated this problem, Arouh notes that it was a growing issue pre-pandemic, especially as supply chains struggled to keep up with ample new construction activity. As Arouh says, “This has shined a light on one specific problem. It is endemic of an issue that we face as the world and economy becomes more global.”
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