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Dive Brief:

• While price growth for office fit-outs has decelerated following historically high rates in 2021 and 2022, costs are likely to remain high in 2024, according to fit-out guides by CBRE, Cushman & Wakefield and JLL. 
• What appear to be increases in construction volumes are actually price increases, not real growth in construction project activity, Cushman & Wakefield says in its report, with supply chain stress, material inflation, higher inflation rates and wage growth making it difficult for tenants to keep fit-outs within budget. 
• Despite their up-front cost premiums, green energy solutions and low-carbon materials provide long-term returns on investment, with a rising demand for sustainable offices prompting efforts to improve the quality of existing office fit-outs, JLL said in a May 29 news release. 

Dive Insight:

Office designs are changing to meet new hybrid work approaches, with workers in the U.S. and Canada spending about 3.1 days per week in the office, JLL says in its 2024 U.S. and Canada Design Trends and Cost Guide.  As employer mandates drive greater in-office attendance, however, companies are increasingly evaluating how physical experience can engage employees and how office design can better support productivity, the report says. 

The push to better support employees working from both remote and on-premise locations is “here to stay and it’s being physically accommodated in the built environment,” Andrew Volz, Americas research manager, project and development, at JLL, told CFO Dive for its story about the JLL report.

Overall construction costs have increased throughout the Americas, even as U.S. construction costs decelerated in 2023 as inflationary impacts begin to ease, according to Cushman & Wakefield’s Americas Office Fit Out Cost Guide. Construction costs, which include common labor, rose 2.7% year over year in 2023, decelerating from an annual increase of 8.9% in mid-2022, the report notes, citing Engineering News Record indexes.

Building costs, which include skilled labor, have increased more significantly, Cushman & Wakefield’s report says. These costs have risen 3.8% year over year and are up 33% above 2019 levels, it says. Meanwhile, labor costs have contributed to significant upward pressure on overall costs in 2023, inching up 3.3% year over year, its report notes. 

Most general contractors Cushman & Wakefield surveyed in the winter expect supplier cost increases to slow down, however. Of those who responded to its winter 2024 GC survey, 57% said that they felt supplier costs had increased slightly in the past six months, while only 8% felt these costs increased significantly. Those responses contrast with the firm’s winter 2023 survey findings, when 38% of respondents felt that supplier costs increased significantly. 

Total U.S. construction costs are expected to see annual increases of 2% to 4% in 2024, with activity slowdowns helping to rein in price increases, JLL says in its report. Of the major metro areas tracked, 96% saw growth under 6% in 2023, or roughly half of the prior year’s increase. The firm’s report also notes that stabilizing material prices and contractors looking to “build up backlogs” kept hard and soft cost growth near pre-COVID historical ranges. Tenant-factor costs, such as audio and video, technology, security and moving services, did see above-average increases, growing 8.3% year over year, its report says. 

There are ways to keep tenant-factor costs down, however, according to Volz. “Look to optimize, not omit,” he said in an email. “Technology like AV plays a pivotal role in enabling and supporting hybrid work, keeping employees connected whether working from home, from multiple offices or third locations. Prioritizing the right technology in the right spaces is key to controlling costs by investing in technology that drives performance.”

Meanwhile, the office sector continues to be “plagued by subdued demand,”  Cushman and Wakefield’s report says. Vacancy rates have increased an average of 4.3% across the Americas since the fourth quarter of 2019, rising to 19.7% in the U.S., it says. 

In the U.S., the fourth quarter of 2023 marked the eighth consecutive quarter of negative office demand, aligning with a historically high U.S. vacancy rate of 19.7%, Cushman & Wakefield’s report says. Despite this trend, “newer trophy Class A buildings are receiving positive absorption as occupiers look for the best space for their employees,” it notes. 

This widening demand gap between lower-class and higher-class buildings within the office market is set to push property owners of older assets to undertake upgrades to remain competitive, Cushman & Wakefield’s report says. As occupiers have fewer new office assets to choose from over the next few years, fit-outs of older spaces will likely continue to compete with newer trophy buildings, with office space renovations more than doubling since 2019, it says.

JLL’s fit-out cost guide found that the national average per rentable square foot ranges from $225 for progressive open office floor plans of base quality and complexity to $326 for traditional office layouts with high complexity and cost. Costs also vary by geography and category, with costs highest in the Northeast and lowest in the Southeast, it says. 

CBRE’s fit-out guide, which breaks out costs by market and layout, U.S. fit-out costs were the lowest in Austin, Texas; Dallas; and Houston and highest in New York City, Chicago, Boston and San Francisco. Organizations are seeking fit-out solutions that speak for their brand and adapt to the changing nature of work, including the increased integration of Internet-of-things technologies in workspaces, CBRE’s report notes. 

CBRE’s report also points to a growing emphasis on carbon neutrality and a “new genre” of sustainable fit-outs, with sustainability taking center stage as a “core criterion in the fit-out decision-making process.”