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The Costs of Commercial Real Estate Development

  

Considering the impact of a thorough budget on the success of a commercial real estate development project, it’s important to understand some of the specifics of these cost breakdowns. You should be able to note not only the anticipated costs associated with your project but also recognize the elements that your estimates are based on.

Let’s take a look at hard and soft costs, examples of each, and how you can estimate the total cost of a development project.


Hard Costs vs. Soft Costs

 

When budgeting for a commercial development project it’s important to remember that costs typically break down into two broad categories: hard costs and soft costs.

 

What are Hard Costs?

These costs consist of tangible and quantifiable materials and elements of the development project. This category typically accounts for roughly 70 percent of your total construction budget.

 

Categories of hard costs items include:

  • the shell of the building,
  • parking,
  • site work and landscaping,
  • additional paving,
  • HVAC units and service,
  • technology and security costs,
  • electrical components,
  • backup power and generation,
  • and construction labor

One of the biggest factors impacting estimates of hard costs is varying material and labor costs. Additionally, varying project specifications can make hard costs more difficult to estimate. Proper use of using historical information, bids, and proposals can help provide better estimates on development projects. It’s also important to factor in contingencies to help cover the unexpected hard cost changes.

 

What are Soft Costs?

Soft costs are those that are not directly related to the physical construction of the building. They consist of a number of elements surrounding construction and drastically affect the hard costs of a project. Proper design and engineering can help to lower a project’s hard costs.

 

Categories of soft costs items include:

  • architectural fees
  • engineering fees
  • interior design fees
  • civil engineering costs
  • permits and fees
  • testing and inspection
  • environmental phase 1 study
  • project manager fees
  • legal fees

Soft costs can also include expenses that continue after project completion such as building maintenance, insurance, security, and other fees associated with the asset’s upkeep.

Again, proper use of using historical information, bids, proposals, and the right partners can help provide stable estimates of a project’s soft costs.

 

The Impact on a Project

Whether the costs fit into either of these two categories or not, establishing a well-planned budget is key to maintaining construction costs. Construction costs impact factors such as a tenant’s rental rate to the projects overall return on investment. It’s always important to have a detailed breakdown of a project’s hard and soft construction costs and to know the effect that they have on its economic viability.


A Closer Look at Hard Costs in Commercial Real Estate Development 

 

Let's take a closer look at what hard costs are and what comprises those costs in the commercial real estate development process.

 

Common Construction Hard Cost Items

Building Shell
This category includes all materials required to complete the whole building or structure. The structure consists of the foundation, framing, floors, roof, finishing work, etc.

Parking and Additional Paving
This includes grading, paving, striping, curbs, and any parking islands. Some of the work may fall into the off-site improvement category and might include items such as a pedestrian sidewalk, along with curb and gutter. It may also involve deceleration/acceleration lanes for higher traffic users.

Site Work and Landscaping
Site work typically includes all utilities underground, water systems, drains, fire, grading, to name a few. As for landscaping, these costs involve putting in grass, trees, shrubs, mulch, and other aesthetic items.

HVAC, Electrical, and Other Equipment
These costs are for HVAC units, installation, and cranes and other equipment needed to install the units. Technology and security costs. Electrical and other equipment will include lighting, technology and security costs, phone and communication systems.

Construction Labor
Beyond just the physical elements that make up the interior and exterior of a site, you have to account for the costs of the labor. This includes general contractors and subcontractors such as carpenters, electricians, plumbers, and any other specialties.

Change Orders
These items may sometimes be itemized under the building structure, but may also be factored in separately. These can vary from market conditions and labor costs to weather conditions and other unforeseen circumstances.

Contingency
This cost covers the amount of money reserved for unforeseen conditions that might affect the construction process. This money is on reserve and is not allocated to any specific area of work.

 

How They Impact Your Development

Hard costs typically account for roughly 70 percent of your total construction budget. Varying project specifications can make hard costs more difficult to estimate. Additionally, changing economic factors such as rising material and labor prices can result in significant increases in project hard costs.

In the end, overall construction costs impact factors such as a tenant’s rental rate to the projects overall return on investment. It’s always important to have a detailed breakdown of a project’s hard construction costs and to know the effect that they have on its economic viability.


A Closer Look at Soft Costs in Commercial Real Estate Development

 

As part of our “series” breaking down commercial development costs, let’s take a closer look at the soft costs associated with the commercial real estate development process.

 

Common Construction Soft Cost Items

Here is a list of some common construction soft cost items.  

Architectural Fees
These fees typically include feasibility studies, schematic design, design development, construction documents, and construction administration.

Engineering Fees
Most projects will require a number of engineers to adequately plan all of the elements of a project. Engineers such as mechanical, plumbing, electrical, structural, and civil will be hired to identify potential issues and help ensure a properly designed project.

Plan Review Fees
Plan review fees are fees paid when the application for the permit and the project plans are submitted for review. In some cases, if the plan reviewer discovers that the calculated construction valuation is higher than the applicant’s declared estimate, a supplemental plan review fee could also be assessed at the time of building permit issuance.

Permit Fees
Commercial developers will also be subject to paying fees for any permits issued for new developments. The cost of the permits may be based on several factors including the size and complexity of your project; the value of the work you are doing; and additional permits required for your project.

Impact Fees
Municipalities charge impact fees to contribute to costs associated with infrastructure and public service expansion due to the new development. These are typically put in place in growth areas as defined by a city’s general plan.

Environmental Phase 1, Soils Testing, and Special Inspections
This entails testing and assessing the potential environmental risks associated with the land being developed. These test can sometimes lead to subsequent tests that get more in depth.

Traffic, Acoustical, Biological, Economic, Archaeological Studies
Depending on the area of planned development, many new projects will require a number of studies to ensure there are no detrimental impacts on the surrounding areas.

Lender and Title Fees
Almost all financial transactions involve some type of fee. The type of fees for construction loans and amounts can vary and may include guarantee fees, processing fees, documentation fees, project review fees, and fund control fees. There will also be legal fees for zoning and lender loan document reviews as needed.

Brokerage Commission
These are fees charged by a broker to execute the leasing or purchase of a property. If based on a percentage, these commissions can be up to six percent of a lease or purchase. They may also be charged as a flat fee in some cases.

 

How They Impact Your Development

Soft costs account for roughly 30 percent of a development project’s budget.

Unlike hard costs, soft costs can also include expenses that continue even after a project is completed. This includes items like building and property maintenance, insurance, security among other ongoing fees related to the upkeep of an asset.

These costs are not negligible as they comprise a significant part of the construction cost, and as noted previously, are integral to ensuring a construction project is possible.


Determining the full costs of a commercial real estate development project is challenging, and the accuracy of an estimate can make a huge difference in whether or not a project is feasible. Finding the right partner gives you the confidence you need to know so that your next construction project can stay on budget and schedule.

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