It's no secret that inflation has seriously impacted commercial real estate. Inflation, or the decrease in purchasing power of currency, manifests as higher costs for goods and services in an economy.
An annual increase in inflation greater than 2% can be problematic when it occurs without a comparable rise in wages. High inflation rates can also indicate an impending recession since businesses typically react to increased costs by slowing production and raising prices.
While we've seen inflation impacting all aspects of commercial real estate—more expensive equity financing, rising operational costs, supply chain challenges—it's made CRE buildouts, or tenant improvements, especially challenging.
When planning for a buildout, you must be prepared for the effects of inflation. Our experts explain four key ways your buildout could be impacted in this post.
Whether your CRE buildout has a timeline of just weeks or several months, or a fixed budget versus a more flexible allowance, the effects of inflation might require you to adjust your plans. For the best outcome, keep these impacts of inflation in mind when tackling your CRE buildout project.
Tenants requiring a buildout should anticipate significantly higher costs during periods of high inflation. Prices associated with construction materials have more than doubled in some instances.
To accommodate rising business costs, an architect could charge more for building plans, and it may cost more to pay a construction company to provide the necessary labor for the buildout. Be sure to account for these inflated labor costs when projecting the total investment of a buildout.
Higher operating costs, including electricity, heating, and cooling, are the new reality for tenants. Even though energy prices may ease in the short term, the future of energy costs is uncertain as the effects of the pandemic continue and new geopolitical risks appear.
Due to supply chain challenges, substantial delays in getting materials to the buildout site may mean unclear completion timelines and delayed occupancy for you.
While some side effects of inflation may be unavoidable, there are concrete steps your company can take to reduce obstacles to your CRE buildout.
Inflation could impact the final cost of a buildout, whether in terms of materials or labor. Consider these increased costs and adjust bidding processes accordingly.
The real estate environment has been impacted by increasing demand for infrastructure, greater construction activity, and a shrinking labor market. Due to these changes in the construction industry, materials are becoming more difficult to secure in addition to being more expensive. Considering supply chain challenges, it may be necessary to update completion timelines for ongoing projects and new buildouts.
Since higher prices will be reflected in the final cost of a project and losses will also lead to more expensive rebuilds, you may need to revise the sum insured to lessen the risk of being underinsured. Your construction insurance broker or advisor can work with you to assess your policy limits.
When your space is not ready by the specified date in the lease agreement due to schedule delays or other unexpected circumstances, it is considered delayed occupancy. The delayed occupancy provision in a commercial lease agreement outlines dates by which you should be able to claim the space. The provision also details the landlord’s duties during construction, compensation in the event of a delay, and lease termination rights.
With inflation, real estate costs involved with buildouts have increased significantly, and labor shortages will continue to challenge tenants. Planning and staying ahead of the curve is more vital now than ever.
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