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Report: Weakened China, Soft Housing Market Won't Reduce Overall Costs

The cost of office building construction in the Bay Area, particularly San Francisco, is expected to rise through this year and possibly through 2020, increasing the need for finding creative ways to save on those spaces. That's one of the big takeaways from a recent JLL report. Bisnow spoke with the brokerage to get the details.


JLL SVP Alex Holton (left with senior project manager Danielle Friend) tells us while the price of construction materials is expected to decline in 2016 due to reduced demand from China and a weak housing market, labor costs will drive overall costs higher. That's especially true for San Francisco, where construction labor costs stand above the national average.

The rise in construction costs has been crazy in the last few years, Alex tells us. Title 24's energy-efficiency demands have driven up retrofitting costs; there's been a 30% increase on the electrical side alone, he says.

Companies end up spending 60% to 70% of their costs on infrastructure that doesn't give them the design pops they want to attract and retain talent, he says, creating a challenge to find ways to meet those demands within their budgets.


For some clients, getting the right look on a budget might mean taking an approach that still creates a "wow" factor, whether it's graphics or paint and wall coverings, Alex tells us. One example is grocery delivery service Instacart, above, which used wall graphics of produce to add a supermarket feel to its headquarters.

New office space is in high demand and new construction is booming (at 6%, San Francisco has the highest office construction growth rate in the US), JLL reports.

But even as the cost of construction is heading upward, the main driver of that growth—tech companies—continues to want tenant improvements that outpace the average $125 to $145/SF for traditional Class-A office space. Average tenant improvement costs for tech or creative space hover between $175 and $200/SF, according to the report.


A lot of people see the high valuations of tech companies and think they have money to burn, but many of them are thrifty and push to get the creative space they want at a budget that often strikes below that of traditional office users, Danielle tells us. Mobile game discovery and monetization platform Chartboost, above and below, chose to decorate its walls with images from video games—and has a giant dinosaur at its offices.

Some may want certain amenities, whether a yoga studio, a rooftop deck or, an increasingly common demand these days—an all-hands area where the entire company can gather (which can be a real challenge as some of these companies grow by 10 or more employees a week). When companies want those amenities, the goal is to prioritize them, then find where to limit spending, such as paring back conference rooms and general open office space, she says.

Creative office certainly comes with challenges, as we learned at our most recent San Francisco creative office event.


New challenges also arise as the large floor-plate space is taken up and companies have to adapt traditional office or industrial buildings to meet their needs. Beyond permitting headaches, fire code issues and other challenges that arise when repurposing those spaces, there are the aesthetic desires of the companies. For example, Danielle mentions one client going into an office space that wants to bring in brick and wood to give it more of a warehouse feel.

It's a fun time with a lot of great construction and great projects, Alex tells us, but there's definitely pressure on CEOs and CFOs to be responsible with the capital dollars they put into spaces. The challenge as prices continue to climb will be to deliver improvements at a price company leaders will tolerate, he says.