Cost of retail construction?

Question

I have the land already, it's a paved parking lot, what would be a ballpark figure for price per square foot, for a 10k sqft construction, about 8 different units with shell condition interior, comparable to a building like this http://s.lnimg.com/photo/poster_1920/60ba6879c8074db6b1861478d5597739.jpg

thank you

Sean Pincus · Answer

Martin,

I work/worked in commercial development and have been involved in building 300k+ retailshopping centers so I can give you a rough idea of what you're looking at. Keep in mind there are a few things that are going to alter the cost (type of shell you provide, outside facade, what township requires).

From the picture, you are talking about a great deal of EIFS, with a knee wall of stone which will keep the costs down (good thing). If you're a higher end center, you will need to put stone wall higher or brick facade.

For instance:

Are you doing the retail leases as Cold Dark Shells (CDS)?
- No electrical conduit or splits, just the main panel
- Turned up sprinkler heads
- No HVAC
- No partitions walls (potentially drywall at the demised perimeter wall and the firewall)
- No store fronts glazing (unless township requires it)
- No slab (stone only and vapor barrier)
- No plumbing (stubbed within 5')
- No toilet rooms

= $65.00 - $70.00 / SQFT

Are you doing the retail leases as Vanilla Shells (VS)? $110/sqft- Everything except the Tenant Allowance / Fit-out

= $95 - $125.00 / SQFT

Are you doing Turn Key (TK)?- Full build out costs (including all Tenant Allowances / Fit-out

Example: I quoted a Starbucks Turn Key at $300.00 / SQFT, keep in mind that they're also 1,800 SF in size.

I do not mean to give information that you already know but a lot of what you provide to the tenant in the construction will alter the price and in turn should alter their rental rates.

Please call me with any questions, I have a lot of experience in retail, residential and multifamily construction.

Sean Pincus · Answer

The problem with credit tenants are that what most refer to as a "credit" tenant is not actually a credit tenant. If they are not publicly traded or privately help and have an implied credit rating (you can call Moody's to request that if private), you most likely do not have a credit tenant. 
	
	Your highest rent payers are going to be the restaurants (quick service food). Restaurants can do pay about 8% - 10% of gross sales psf all-in. I apologize if this sounds like 'baby' speak but I want those that want to learn to understand as well. In commercial real estate the tenant has an "operational percentage" they work off of. Meaning the all-in costs (taxes, insurance, marketing, rent and any additional CAM fees) must be less than their max "operational percentage".

Example: Restaurant 'A' does $550/sqft in sales (which is typical of a burger joint, or a Chipotle). They are willing to pay 10% of those sales toward operational costs as stated above. They will effectively be willing to pay $55.00 in rent. If you have a CAM charge + Insurance + Taxes equal to $5.00 sqft, they would be willing to pay you a rent of $50.00 / sqft for that space. Keep in mind good negotiations, location and other tenants in the mix drive a restaurant.

Another thing to keep in mind, for a successful center... please have enough parking. I would err on the side of 10 spaces per 1,000 sqft of space when it's a restaurant, 3-5 spaces per 1,000 sqft of space when it's a retail/goods tenant. If you end up with a furniture store that can really help your parking. Nothing defeats a retail shopping center more than a nightmare for parking. It has killed some of the best centers in the country.

Ronald L. McEachin · Answer

10000 sq.ft. Steel retail store with 43000 sq.ft. Price

Mark Creason · Answer

Joel,

Interesting point about the Parent corporate guarantee.  I saw a Fresh and Easy recently where the parent was not the owner, but they created an LLC to front the lease.  Fresh and Easy's parent corp has an investment grade, but limit liability this way.  Financing this property would be more costly and might require a personal guarantee instead of going non-recourse.

Mark

Joel Owens · Answer

For the best loan terms and resale ability once built out the credit tenants are best.

Now there are catches to this.

The three main business credit agencies are:

Standard and Poor's

Moody's

Fitch's

Most look at the S & P over the other two for commercial lending.

Here is a definition chart of the various level of credit grades.

S & P Credit Ratings Scale

The best loans are for INVESTMENT GRADE credit. Those are rated BBB-  or better. The ones below BBB - are considered to be more risky loans and tenants.

Now the catch is you will see a lot of sellers or listing brokers touting how strong a company is etc. when selling. In my view it's bait and switch and here is why.

Unless you have a PARENT CORPORATE guarantee for the lease then it doesn't matter that they are a billion dollar company and investment grade.

You will see things where it's a subsidiary of the parent corp., large franchisee, or small franchisee. Those levels of protection are not as strong from the lenders standpoint thus down payment gets higher and recourse sometimes is involved. In commercial it's all about the terms of lease and who is guaranteeing it.

Sean Pincus · Answer

I forgot... the list of things to keep in mind with making decisions about your retail center

- Co-Tenancy: Make sure the other tenants work well with the tenants you think you want... most of them will require this in the lease if they know anything about retail leasing.

- Credit Worthiness: Banks will not finance a deal that doesn't have a financial ground to stand on.

- Length of Term: If you believe in your retail center, some Landlords will do 5 year terms with no options. However, if you feel you want better financing terms from a bank than a 10 year term with tenants will help you out.

- Tenant Improvement Allowances: Keep these down! If a bank doesn't like a tenant because of credit worthiness, at least you can find it with the fact that it's no money out of pocket. Especially if you can also do a Cold Dark Shell

- Kick Out Provisions: Limit these to none if possible. If a tenant requires this (most will try), make sure you make it difficult for them to get out of the contract with a lot of penalties for those that do.

Martin Z. · Answer

@Joel Owens at this point, build and hold, but I think waiting for a build to suit arrangement with a credited tenant would be the best option, so I don't end up dealing with vacancies until mom and pops fill them up.

Joel Owens · Answer

Martin what are you trying to do with this land??

Hold the retail indefinitely for yourself?? Sell it off upon completion??

You need to reverse engineer the selling price back down to land acquisition costs you have in it and hard and soft costs.

You will have a certain price all in for a cap rate and then your resell will be a lower asking cap rate an your gross profit will be the difference.

I am more on the transacting  side and not the building side. If you fill the property with mainly national tenants instead of mom and pop like in the picture it will be much easier to sell. The mom and pop tenants signing up for a new retail center is hard to get financed. Mom and pop generally you have to show years and years of stability with the cash flow. Conversely investment grade national tenants can open a new location in your center and lenders feel good about it because the guarantee on the lease covers other locations.

Joe Fairless · Answer

@Sean Pincus so that would be a resounding, yes. Wow, very impressive. No specific questions at the moment but I'm going to add you as a friend on here and, if it's ok, might ask you some in the near future.

Cost of retail construction?

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