The main focuses in construction methods
There are three main types of construction methods: the Traditional Method; the Design and Build; and the Construction Management Process. These methods all focus on different priorities. The traditional method allows the occupier to have some control over the design and specification. In this type of construction, the emphasis is usually on the quality of the finished result rather than the cost of the build.
The design and build method is when the plan is designed on the main requirements of the parties involved. This is usually the case when the build is formed on the cost rather than the quality.
The third method, the Construction Management Process, allows construction on the building to begin before the design of the building is complete. The main focus of this method is usually time over cost.
Potential benefits and risks to the occupier
Pre-lets hold many benefits for a potential tenant. As previously mentioned pre-lets usually allow tenants to pay lower rent and as a result, lead to better financial terms. Also, since the construction isn’t complete, the potential tenant can have a larger influence over the design of the building, making the space more suitable to their specific business.
For a tenant taking up a pre-let, a main risk is the potential that the building construction may not be completed on time. If a tenant’s current lease is nearing its expiry date, the uncertain timings of the incomplete building can be a major cause for concern. Another potential risk for occupiers could be the longer lease commitments that come with a pre-let building, as pre-let leases are often a minimum of 20 years. There is also the risk that the completed building will not live up to the occupier’s expectations.
Potential benefits and risks to the developer
One of the main benefits for a developer to enter into a pre-let agreement is to develop a strength of covenant and increase capital value. Furthermore the use of pre-letting a building before it is completed can also help to launch larger, more expensive projects. A pre-let arrangement may also support lenders requirements and ensure finance is available for the build costs.
However there are a few draw backs when it comes to developers using pre-let agreements, with money being the main concern. As pre-let buildings are usually set at a lower rental rate than an existing building, the developer may end up losing profit. As a pre-let is an agreement entered into before the building is constructed, the developers will not be able to take advantage if the rental prices increase during the construction period.
The demand for office space in financially growing cities such as London and Manchester will surely see a significant rise in pre-let buildings. Pre lets are usually proven to be at their most popular when there is a surge in corporate occupiers. Although the pre-lets come with an amount of uncertainty, once entered into, they have many potential benefits for both the developer and the occupier.