Industrial tenant improvements are definitely learning how to implement all the latest trends in energy efficiency in the best possible way. If you are here to learn more about tenant improvements and start implementing these new strategies, you will not be disappointed. Let us tell you all how this aspect of home improvement is an investment in your property or real estate.
For those who are still second guessing this decision, after this article, you will know what to do. Don’t thank us, but use these ideas to your advantage and make the most of it!
Why Is Tenant Improvement So Important?
While tenant improvements (TIs) on industrial properties remain focused on the functional attributes of a building, industrial occupants have broadened the definition of functional to include energy efficiency and optimal usage of space.
Capital vs. Tenant Improvements
When discussing tenant improvements, it is important to make the distinction between capital improvements and tenant improvements. Capital improvements are investments a landlord makes upfront to more effectively market a property. These may include parking, lighting and dock upgrades.
Tenant improvements, on the other hand, can vary and are subjective to the tenant and structure of the lease terms. These usually include office build out, upgrades to power and improved/additional loading access.
Industrial properties are meant to be more durable than other property types, with function outweighing form by a wide margin. Although today’s industrial user is not focused on new industry standards such as LEED Certification, they are interested in space and energy efficiencies. Office build outs are planned more efficiently, and tenants are demanding better use of energy. This has resulted in new types of TIs that include energy-efficient lighting and roof irrigation systems.
Types of Industrial TIs
Except a few common TIs, many industrial properties are often leased as-is in today’s economy. The most common form of improvements on industrial properties is the build out of office space. Typically, 5 to 10 percent of the industrial square footage is for office space, and 2 to 5 percent of the landlord’s asking rate is allocated to this expense. Depending on tenant needs, other common improvements include increased power capacity and additional loading access.
As mentioned previously, tenant improvements can vary based on the needs of users and terms of the lease. In the new economy, landlords are hesitant to spend large sums of money on specialized TIs. Although a percentage of the asking rate is allocated to TI’s, a longer lease term could result in greater improvements.
For example, a 10-year lease with a good tenant could motivate a landlord to agree to allocate more money to TI’s. The type of industrial use is a factor, and TI’s can range significantly from warehouse distribution facilities to manufacturing or cold storage.
According to a recent CBRE National Industrial View Point publication, U.S. trends indicate that landlords continue to offer aggressive lease rates but are beginning to tighten on free rent and extra tenant improvements. Additionally, cash-conscious landlords are reluctant to fund larger tenant improvement allowances.
Locally, landlords of existing industrial properties have begun to invest in retrofitting existing buildings. This can be attributed to some significant changes in the supply of new industrial properties.Over the last 12 months, 1.6 million square feet of new speculative construction was introduced to the industrial base.
Current projects are already attracting tenants as evidenced by the 507,000 square-foot Landmark 8 building that is already 88 percent pre-leased. The addition of these brand new industrial properties has also created upward pressure on lease rates, particularly in transactions over 100,000 square feet.
Currently, Salt Lake County has one of the lowest industrial availability rates in the country. Looking ahead, availability is anticipated to decrease further which will push lease rates up. This scenario could bode well for landlords as decreased supply increases their ability to negotiate lease terms, including the degree of tenant improvements they are willing to make.