Most Industrial space comes with the set of standard improvements that the landlord will do, including basic office, bathrooms and warehouse light. Depending on the market, other landlords will only lease the space as “Shell” which is just the walls and the roof. It is essentially the “skeleton” of a space.
We always recommend having the landlord do the improvements and deliver turn-key space. However, for specialized business and if landlord is not knowledgeable on construction, then it’s better for tenant to complete the work. Here we explain more about leasing “Shell” space.
Leasing an industrial space on shell condition can be compared to buying a classic car in some respects.
Sure - the space may be move-in ready, but you’ll likely have to do a little work and fine-tuning to get the space up and running.
While you could spend the money and purchase a fully restored vehicle, some classic cars come without an engine, may be missing an AC compressor, or could be completely empty except for the shell of the car - leaving some upside and cost savings on the table for anyone willing to put in the work.
Sound a bit familiar to a specific type of industrial space?
That’s because it is!
Here’s everything you need to know about leasing space described as a “shell”.
Many tenants will run across a shell lease during their search for space.
The term “shell” is also not universal, as a shell lease may be an entirely unfinished shell or it may have certain improvements that place it slightly beyond a shell lease classification; it can vary depending on the type of property and the ownership.
However, you can expect a shell lease to have the structural components of the building completely intact, such as a roof, a floor slab or gravel, and exterior cladding to protect the space; hence, why it’s a called “shell” lease.
Why Tenants Would Want to Lease Shell Space?
Building out an industrial space from a shell sounds like quite a bit of work. So, why would you want to lease such a space? One point is that shell condition space gives the tenant a greater range when it comes to improvements and customization.
The tenant has the liberty of deciding where they would like to place their bathrooms, how their ducting system will be designed, which interior finishes and selections to use, and so much more.
If an owner makes the improvements themselves, they will likely finish the space out to “building standard finishes,” which may not be up to spec for the tenant’s desired finishes.
Costs Are Also Different Than Second Generation Space
Shell spaces are typically offered at lower rates than fully finished industrial or warehouse spaces due to the up-front costs of improvements that the tenant must provide to get the space ready for business.
Tenants may be able to recover some their initial cost through a combination of the lower rent rate and tax write-offs from space improvements.
Tenants aren’t always responsible for paying for 100% of the costs involved in the new build-out.
Completely renovating a space can be quite costly, which can make it very difficult for a landlord to lease their space, which is why they’ll often offer tenant improvement allowances (TIA). Tenant improvements are funds paid to the lessee by the landlord after the build-out has been completed to help with the build-out.
Depending on the lease agreement, an owner delivering a space as a shell condition may offer TIA to offset the costs of improvements to the tenants and make the lease more attractive.
Why Industrial Space Is Delivered In Shell Condition
You may be wondering why an owner would deliver a space as shell. Well, there are multiple reasons, namely:
The lower the cost of the building is to the owner, the less financing the owner will incur. Of course, they’ll be incurring these expenses at some point, but by not drawing on those funds before having set plans, property owners won’t be incurring any interest carry involved with the loan.
Not having the space built out already also gives the landlord flexibility as to which kind of business they can allow to occupy the space. Whether the tenant needs an open floor plan or a number of private offices, the space could be built out to suit their needs.
Another benefit is that construction will not be wasted; a tenant is going to add the amenities and features they need whereas the tenant may find that they don’t need certain amenities and features if the space had undergone improvements prior to their lease.
Think about it this way - most of these spaces have poured concrete floors that are either finished and exposed or covered by some sort of flooring. If a manufacturing company came along and needed a significant amount of plumbing and gas lines in the floor, they’d have to tear up a significant amount of already built improvements, incurring expenses they wouldn’t have otherwise had.
The Downsides of Leasing Shell Space
These delivery conditions are far from perfect for some tenants, too, and dark shells do come with a few drawbacks.
A building without lighting and HVAC can be unattractive for some companies because of the additional time requirements and expenses that can be incurred; thus, you typically don’t find cold dark shells outside of prime locations in your city.
Also, the more improvements a tenant must make on a space, the further along the tenant’s move-in day will be pushed along. Most of these improvements can’t be made quickly, which can lead to a delay in the tenant’s grand opening.
The more improvements a tenant must make on a space, the further along the tenant’s move-in day will be pushed along.
What “Shell” Condition is Best for You?
If you’re ready to move in and begin your industrial or warehouse operations ASAP, a turn-key space might be the best solution. It allows you to move quickly and worry far less about space plans, construction, and reimbursements.
However, if your business needs customized buildout, are ready to build-out your space from the ground up, want more options during the build-out, and don’t mind the cash expenditure up front to get your space in perfect condition for your business, then you should take a look at spaces delivered as shells – an option that will provide the most flexibility for your industrial business.
Ready to find the perfect industrial, warehouse space for your business? Contact our Team today to look at all the options available on the market.
About the ComReal Miami Industrial Team: The ComReal Miami Industrial Team has been assisting companies with their South Florida real estate needs for over 30 years. The industrial team specializes in the sales and leasing of industrial properties. Visit Warehouses Market and/or call 786-433-2380 for more information.