Office fit-out. A focus on cost optimization

Authors:  Maksymilian Sobczak, Associate Director, Office Agency at Avison Young and Michał Kiersnowski, Sales Director, Office Department at Reesco

Due to the increase in prices of electricity, utilities, services and minimum wage, as well as local taxes and fees, we are experiencing significant increases in operating costs in office buildings this year. In Warsaw, depending on the class of the property and the components of the operating costs, we have observed an increase ranging from 15% to as much as 30-40%. Tenants are now paying particular attention to the components of the settlement that may vary depending on the building, as well as technological solutions that allow for reducing utility consumption.

Moreover, rental rate indexation is most commonly based on the HICP (Harmonized Index of Consumer Prices). The nearly 9% increase is clearly felt in the market. It has also influenced the starting rates for new tenants, as well as the rising costs of fit-out, which the building owner must amortize over time. The Office Agency department at Avison Young, together with Reesco, is considering how to optimize the costs of office fit-outs.

Cost optimization

The costs of office space fit-outs and reconfigurations have significantly increased over the past two years. Economic challenges, disruptions in the supply chain, and a growing real estate market have contributed to dynamic price increases in materials and construction work. Additionally, the need for restructuring global organizations due to changing work patterns and high levels of inflation poses challenges for companies in building long-term strategies, especially those that need to adapt to lease obligations. We must also consider the strong trend of incorporating environmental consciousness into the entire supply chain.

Before starting work on creating a space plan that meets the tenant's expectations, it is worth conducting a thorough technical analysis of the space with installations’ audit, and reviewing all elements included in the subcontractor documentation. The right team, consisting of professionals experienced in reconfigurations, architects focused on finding functional solutions while preserving the maximum amount of existing building elements, and experienced surveyors, can significantly reduce costs with minimal initial investment.

Expensive installations

One of the most expensive elements of fit-out costs is the HVAC installations, along with building automation components. Any changes required for these systems incur additional costs. The more changes we make to the existing spatial layout and the less we utilize the current installation system, the more expensive the arrangement becomes, with space planning being primarily responsible for this. Optimal design of a new layout can lead to cost reductions of up to 80 euros per square meter. The knowledge of the architectural team regarding material engineering allows for the selection of the most cost-effective solutions—ones that are cheaper but still meet the required specifications.

The right team

The synergy between architects, MEP (mechanical, electrical, plumbing) designers, general contractors, investors, and tenants is crucial for optimizing fit-out costs. Each partner brings unique perspectives and skills that ultimately shape the final outcome of the project. It is important for mutual education and knowledge-sharing about possible solutions, especially in such a dynamically changing socio-economic landscape. - says Michał Kiersnowski, Sales Director, Office Department at Reesco Group.

Timing is also important

Avison Young notes that the more consciously a client approaches the leasing process with an adequate time reserve, the greater the benefit for him. This allows for analyzing each parameter of the offer in multiple ways and exploring different options. Often, it is simply too late to prepare an alternative fit-out design that would be equally effective for the tenant while also being cheaper. - adds Maks Sobczak, Associate Director, Office Agency at Avison Young. - Our task is to facilitate the transaction at every stage of the process and negotiate the appropriate financial terms based on precise data that we are confident about and align with the client's vision.

Fit-out pricing vs length of leases

The rising prices of fit-outs often force tenants to revise their plans. Due to the cost of relocation and setting up a new space, some companies choose to extend their lease agreements. While the landlord is typically responsible for the fit-out, in order for the fit-out costs to be feasible, lease agreements must now be signed for longer periods.

Previously, 5-year lease agreements were standard in new buildings, while smaller fit-outs for 3-year terms were possible in older facilities. However, in the past 2-3 years, 7-year lease agreements have become the new standard in new buildings. Longer-term contracts are also occasionally seen. Considering other parameters, the cost of the fit-out would often exceed the rental income.

Time for modernizing older buildings

In times of high activity of tenants, we cannot forget about older office buildings, especially those built in the years 1990-2000. This is precisely the moment when owners of older buildings should respond to the needs of tenants and focus on repositioning the properties, improving their quality, and creating a friendly work environment and atmosphere. Investments in older buildings can yield great returns in the short term. It is possible to achieve impressive and cost-effective renovations in older buildings, but it requires more effort, analysis of the current state, and determination from all parties involved.

Modernizing existing properties with the right approach allows for a satisfying return on investment with less negative impact on the environment. Consequently, we avoid waste and excessive exploitation of natural resources. Such projects can prove to be more cost-effective because by utilizing existing infrastructure, often in attractive locations, we minimize implementation costs.

Of course, taking into account existing conditions and limitations poses a challenge, but at the same time, it provides an opportunity to uncover the unique features and characteristics of the existing buildings. Renovating older buildings also allows for the preservation of historical value and cultural heritage, harmoniously combining them with modernity and creating spaces with a distinctive character and functionality.

Case study – HOP in Warsaw

The experience of the Reesco Group shows that older office buildings can successfully continue to serve their original purpose or undergo transformation, such as being converted into a modern hotel or a PRS facility. An example of our accomplishment is the HOP building on Chmielna Street. The comprehensive transformation carried out by the Reesco Group on this 90s office building has resulted in its almost 100% occupancy rate. - Michał Kiersnowski adds.

Time for changes

More and more regulations introduced by the European Union regarding the energy efficiency of buildings and alternative energy sources are also pushing owners of lower-standard office buildings to make decisions about their modernization, change of function, or demolition and construction of more modern facilities. In the coming years, we will likely observe a growing number of such actions aimed at preventing the loss of value in properties that do not meet the required sustainability standards. The growing need for flexibility will soon have to translate into a new product that landlords will be compelled to provide.