Ground-Up Construction or Renovation: What's Best for Your Business Space?

Small business owners when purchasing their commercial real estate to establish or expand their business operations often grapple with the dilemma: Build from the ground up, renovate an existing structure, or buy a space and renovate it?

The decision you make will have a significant impact on your construction budget and schedule. So, it’s important to consider essential factors like cost, project timeline, design flexibility, and sustainability while choosing between commercial renovation or ground-up construction.

Through this blog, weigh the advantages and disadvantages of both ground-up construction and commercial renovation. Additionally, note the key considerations to bear in mind when making an informed decision for your business space.

Let’s begin!

Table of Contents

Understanding Ground-Up Construction

A ground-up construction project involves constructing an entirely new building from raw materials on an empty plot of land. This means demolishing any existing structure, scraping and preparing the land, laying new foundations, constructing the building, installing utilities, and giving interior finishes.

Ground-up construction process entails the following phases:

Planning and Development
Designing
Pre-construction
Procurement
Construction
Post-Construction

The US Commercial Construction Market Size is estimated at $619 billion in 2023 which is forecasted to reach $728 billion by 2028, increasing with a CAGR of 3.3%.

Pros of Ground-Up Construction

Design Freedom: Building from the ground up endows business owners with complete freedom over the design and features of the commercial space. For example, instead of cramming products into a limited shelf space, your retail store can have dedicated sections to merchandize specific brands or designers.
Higher Returns On Investment (ROI): Ground-up construction lets you construct a property tailored to your unique vision, making it appealing to niche business owners. As the landlord, building a property from scratch with certain business needs in mind can reduce tenant improvement allowances you will need to provide to cover the tenant’s renovation costs. This gives many cost-saving advantages and higher ROI.
Blank Slate or Canvas: The biggest advantage of a ground-up construction project is unlimited customization as per the company’s requirements without the burden of existing structures and materials. It eliminates potential risks associated with older buildings such as structural damage, expensive repairs, and permit renewals.
Control Over Budget and Timeline: With ground-up projects, business owners have the advantage of developing their budget and scheduling project timelines. This aligns the commercial construction with the owners’ specific goals and priorities. For example, when building an adaptive office structure from the ground up, you can have future expansion plans of accommodating co-working spaces in later years without facing budget restrictions.
Advanced Infrastructure: Ground-up construction enables commercial real estate developers to install latest technologies and energy-efficient upgrades from the start, creating a high-performance building and thus increasing its property value.
Lower Maintenance Costs: Commercial contractors often use new construction methods and materials for building structures from the ground up. Hence, they possess higher structural integrity and longevity, resulting in lower maintenance costs.
Code-Compliant: Since all new constructions are designed to meet latest building codes and regulatory requirements, they face minimum compliance-related issues.
Ground-Up Construction Loans: Construction loans by the Small Business Administration (SBA) for completing ground-up projects come with extended periods. Usually, lenders will approve ground-up construction loan programs for 18 to 24 months which is enough time for commercial builders/investors to construct their business space. The borrower can also finance additional costs or change orders with a 10% contingency included by the lender.

Cons of Ground-Up Construction

Extensive Preconstruction: A whole range of preconstruction activities are carried out before breaking the ground. Owners must secure an approved construction loan, develop architectural plans, obtain permits, hire a commercial contractor, and keep a budget and schedule in place. They have to plan everything in detail so that the project is well-executed without any issues.
Room for Errors: As opposed to a commercial renovation where only a few aspects need modifications, new constructions are more prone to unexpected errors. For example, design flaws in the architectural and engineering plans can lead to costly revisions and delays. Similarly, bad weather can affect the progress of ground-up projects if ample buffer time is not planned.
Supply-Chain Barriers: Depending on the market conditions and inflation, labor and material costs may fluctuate or be higher than the owner’s budget. Moreover, shortages or late lead times of materials and equipment can delay the ground-up construction project.
Higher Initial Costs: Building a structure from ground up requires a high amount of investment especially when accounting for land acquisition and infrastructure development.
Longer Timelines: As ground-up construction projects start from zero, they involve an extensive scope of work, and hence, take several months or years to finish. The permitting process itself may take 6 to 12 months.
Site Scarcity: Limited availability of suitable land, especially in urban areas is one of the disadvantages of undertaking ground-up projects, leading to higher land acquisition costs.

Understanding Commercial Renovation

A commercial renovation project involves updating an existing space or building without changing its intended purpose. The renovation process may include applying new paint, installing new flooring, replacing outdated energy systems, reconfiguring spaces, etc. Commercial general contractors demolish and reconstruct specific parts of the structure during renovation, enhancing its function and purpose.

Updating an existing structure with modern improvements can increase the owner’s revenue potential by attracting high-paying tenants. Furthermore, commercial renovations can also be undertaken to improve space efficiency, reduce a building’s overall energy consumption, or represent brand identity.

According to Statista, the market size of commercial building remodeling in the United States was estimated at $51 billion in 2022.

Pros of Commercial Renovation

Requires Less Effort: The stress of any commercial construction project reduces when the heavy lifting is done, and the structure is already constructed. As a business owner, you simply rent out the property in its existing condition and make minor adjustments or repairs to give the space a facelift. Because the base structures are already ready, it’s easier to acquire building permits.
Less Expensive: Renovation projects are less expensive than starting from scratch as there are no land acquisition expenses with the majority of structural work already in place. They are also less intensive in terms of labor, materials, and costs. Once the commercial renovation is done, business owners can profit by increasing the rent.
Faster Project Delivery: As you are refurbishing an existing structure, commercial renovations take shorter timelines to complete. You don’t have to spend much time renovating an older building since most of them have pre-existing infrastructure from foundation to fixtures.
Preserves Character: By renovating an existing building with modern technologies, property owners can preserve its historical character such as timber floors and intricately designed ceilings. Not only does this approach lend an architectural charm to your space but it also minimizes waste and resources needed for ground-up construction.

Cons of Commercial Renovation

Limited Scope of Customization: With commercial renovation projects, business owners do not have the freedom to add new spaces or incorporate branding elements. They are bound to work with existing layouts and structural frameworks, compromising on their dream vision.
Hidden Structural Issues: Older buildings may have hidden structural issues, for example, lead, asbestos, termites, mold, or faulty workmanship from the previous contractor. This can result in additional expenses during the commercial renovation project.
Compliance Hassles: Adapting an older structure to comply with latest building codes and regulations can be a headache for the commercial construction company. The general contractor has to amend many components to bring the renovated building up to code. This adds extra costs to the project’s bottom line.
Higher Rents: Not being the building owner will likely cost you higher rents. You will need to acquire permission from the landlord to execute any renovation on their property. Many landlords are uncomfortable with major renovations.
May Exceed Budget and Timeline: Commercial renovation projects may get delayed and over budget than initially planned due to expensive repairs or upgrades. For example, a heritage hotel renovation may exceed its construction budget and schedule for meeting updated ADA standards and energy efficiency requirements.
Not Suitable for Future Expansion: Because commercial renovation projects don’t allow much design flexibility, they might restrict your company’s ability to expand in the future as you can only work within existing boundaries of the building.

How to Make an Informed Decision: Know Your Business Needs

The most essential step is to understand your business requirements when confused about whether to build new or remodel. Your budget restrictions, target location, launch deadlines, design specifications, and environmental goals, all impact your decision. Here are top 10 questions to determine what exactly your business requires and which option will fulfil those needs.

What is your vision and business goal for the new space?
What are your preferences for aesthetics, functionality, and energy efficiency in the space?
Does your existing location align with and promote your business strategy?
What is your budget for the project, do you plan on securing a commercial construction loan?
Do you have a specific timeline or deadline for launching your business operations?
Will your commercial property need to accommodate growth in the future?
Are there any strict zoning or regulatory restrictions in your area that might be a barrier for your project?
Is your existing building structurally sound and appropriate for renovation?
What are the market demands and land availability in your target location?
What are your company’s environmental policies and sustainability goals? How will you align them with your construction project?

By answering these questions, you can make the right decision on whether ground-up construction or renovation will meet your business needs effectively.

Choose Ground-Up Construction When..

Time and Budget are Not a Limitation.

Fortunately, if there is no resource limitation and you can arrange uninterrupted cash flow, then ground-up construction may be a better option. If your business is free of strict deadlines, consider waiting for a new structure to be built from the ground up.

You Want to Avoid Compliance Issues.

Regulatory compliance issues are complicated and add extra costs. Even if you are renovating a balcony, it can trigger new ADA requirements, subjecting the entire building to non-compliance. Hence, building the property from the start is much more convenient in terms of administrative compliance.

You Want Complete Design Flexibility.

If you want a building design that meets the company’s exact specifications and reflects its brand, then new construction will be the right decision. From functional design, advanced layout, specialized rooms, and extra wings for future expansion, you will have full creative control. Getting a maximum level of design flexibility will create an exemplary building that can serve as an inspiration for the community.

Current Location is No Longer Suitable.

If your location doesn’t support your business needs or has deteriorated, it’s time to find another one. Many times, renovating an existing building is not possible because of structural challenges, permitting issues, or regulations linked to historical structures. In such cases, ground-up construction is the solution.

You Don’t Want Unexpected Issues.

When stripping off the existing ceilings and walls during renovation, you might encounter hidden asbestos, water damage, lack of seismic bracing, or code violations by the previous contractor. If you don’t want such unforeseen problems to increase your expenses, opt for ground-up construction.

Planning to Apply for a Construction Loan.

Commercial construction loan lenders typically are more interested in financing new projects than renovations of existing structures. If your company qualifies for a SBA loan, the interest rates will be lower with favourable repayment terms. Besides, ground-up construction loans include a contingency (an additional 10% to the project’s cost estimate), making the deal risk-free for lenders and borrowers.

The Business Needs to Grow in the Future.

If you are planning the incorporation of additional sections as part of your business expansion strategy, building from scratch will help. Let’s say, you can design a private dining area, lounge with a dedicated bar, outdoor patio, or an event hall to grow your restaurant business in the future.

You Aim for a Higher ROI.

A new construction has the potential to make a larger profit with a high resale value. Another way to maximize ROI is leasing additional space and generating rental income to offset investment costs. A ground-up construction project may even provide you with many tax benefits.

Increasing Property Value

New constructions are built with high-quality materials and advanced systems because of which they have low maintenance costs. This significantly increases your property’s market value and you can further amplify it by working with a reputable construction company.

Choose Renovation When..

Land is Unavailable in a Desirable Area.

If there is a lack of vacant land in your target location, for instance, populated urban settings or suburban areas with more access to natural land, then renovating an existing commercial building is your ideal option.

The Business Urgently Needs to Open Its Doors.

Except for historical buildings, most commercial renovation projects take 3-12 months compared to ground-up constructions which can last for 12-18 months or longer. If your business can’t afford the downtime associated with new construction, renovation is a good idea. Making tenant improvements to an already built structure allows quicker occupancy and business launch.

Looking for a Few Improvements and Updates.

Prefer commercial renovation or remodel when you are looking for a cost-effective way to make some improvements and updates to your business space. Say, when planning to change your building’s layout, modernize the workstations, or simply upgrade the technology infrastructure, conducting a renovation would be a practical choice.

There are Budget Constraints.

The commercial construction cost of building a new property is relatively higher than renovating an older one. Ground-up projects involve land purchase costs, architectural design fees, utility expansion costs, building inspection and permit fees, as well as contractor fees, among others. Change orders and budget overruns are more common in new builds than renovations.

Obtaining Permits and Approvals From Scratch is a Hassle.

Most ground-up construction permits and zoning approvals from the regulatory bodies may take several months of waiting. These include permits for demolition, construction, MEP (mechanical, electrical, and plumbing) permits, stormwater management, utility permits, etc. Acquiring permits for commercial renovation is less complicated while some projects may not even require permitting.

Sustainability is a Top Priority.

If your company believes in preserving the planet by reducing negative environmental impact, consider a renovation. New construction demands significant use of raw materials and energy, producing new waste. Thus, it’s better to integrate renewable energy systems, repurpose old fixtures, and employ green building materials during renovation to leave a minimal carbon footprint.

Case Studies

Ground-Up Construction of Mississippi Workshop, Portland.

Business Goals Achieved:

The use of mass timber construction for all building components, a first for commercial projects in Oregon, resulted in a sustainable build.
Exposed wood surfaces throughout the building’s design eliminate the need for additional finishes or fireproofing.
A ‘rain jacket’ of weathering steel on the exterior and radiant concrete flooring.
Features an organizational layout with 6 equal rooms on each side of a shared courtyard.
The building’s inclusive design accommodates a cafe, maker space, and bicycle parking on the ground floor, studio/meeting spaces on the second and residential units on the third floor.
The project received a USDA/US Forest Service Wood Innovations Program grant for its potential in innovative approaches.

Overall, the Mississippi Workshop serves as an outstanding example of how ground-up construction can develop an adaptable, future-proof, and sustainable model. (Source)

UTA Offices Renovation, Nashville, Tennessee

Business Goals Achieved:

The successful transformation of the former Nashville Public Library, a mid-century New-Formalist landmark, into a contemporary headquarters for UTA is a perfect example of adaptive reuse.

The commercial renovation of a 15,000-square-foot building efficiently uses space with 22 private offices, 36 workstations, meeting rooms, phone rooms, a wellness room, a rooftop deck, a mezzanine cafe, and lounges.
The office design, referred to as a “gallery of talent”, represents UTA artists, creatives, and entertainers, showcasing their clientele.
Darker tones, textures, and materials were added in a previously white box space to improve the office’s visual appeal. For example, black-stained oak reception desk and dark vertical glass panels.
Installed acoustical gypsum ceilings and ribbed wallcovering for privacy.
Incorporates wellness rooms, sit-stand desks, and a central oak stair to the office’s design, promoting employee well-being.
A rooftop deck serves a dual purpose of outdoor working spaces and hosting parties, events, etc.

The renovation of the UTA Offices addressed company needs and maximized available space while preserving and integrating elements of the historic library. The project demonstrates how a strategic renovation can benefit a business. (Source)

Conclusion

The decision to choose between ground-up construction or renovation ultimately hinges on individual preferences. Both commercial renovation and ground-up development have pros and cons that business owners must weigh during evaluation. Consider the aforementioned factors and seek advice from an experienced general contractor to make an informed decision that will benefit your business.

Whatever decision you take, Constructive Solutions, Inc. is here to assist you. Our expert commercial general contractor services will deliver tailored solutions whether you are revitalizing existing spaces or building new ones.

Reach out to our team today.

FAQs

What is the renovation cost per square foot in the United States?

The average renovation cost per square foot is $200. Costs can range from $30 to $500 per square foot depending on the scope of work and location.

What is the meaning of ground-up?

The term ground-up means completely or thoroughly. In the construction business, a ground-up project builds a new structure from scratch using raw materials.

Is it possible to use both ground-up and renovation for my project?

Yes, it is possible. As a customized solution, you can choose to preserve specific parts of the existing building while adding new portions or features.

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