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Trends in law firm construction costs and strategies to navigate today’s environment: what goes up doesn’t always come down

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In 2019, it cost $300 per square foot (psf) to build a typical law firm space in downtown Washington, D.C. Today, the budget for the same space has increased by 50% to over $450 psf. In certain regions, firms are witnessing a 30% increase in furniture costs, while mechanical, electrical, and plumbing (MEP) costs have risen by 15%. Although the volatility of the pandemic has lessened, critical challenges remain that will affect construction costs indefinitely. Law firms are asking why this is happening and what they can do to manage their construction budgets while achieving the results they need to support their practices.

In this edition of The Legal Tenant, Tom Fulcher, chair of Savills Legal Tenant Practice Group, sits down with Executive Director of Project Management David Fletcher to give insight into the current drivers of construction costs and what strategies can be employed to manage prices and the process effectively. Dave recently joined the Washington, D.C. office after over 28 years in the general contracting field, where he was responsible for the build-out of over one million square feet of high-end law firm space.

Tom Fulcher: Many factors have driven dramatic increases in construction costs over the past several years. Let’s discuss the largest drivers of those increases and if we expect the rise in prices to continue.

Dave Fletcher: I’ll start by saying no. The substantial increases are not expected to continue. The market is not as volatile as it has been, and, over the last couple of years, post-pandemic conditions have eased demand. However, two major factors always drive construction costs: materials and labor. In the past, material costs have risen because of strained supply chains, high demand, and the logistics of shipping materials to meet this demand.

Labor follows a similar pattern. The supply of skilled labor remains tight, and there is a high demand for workers, particularly in specialized trades, combined with the need for extensive training. It takes great skill to work in the construction industry, and demand for these skilled workers continues to outpace supply. This shortage affects all the trades involved in a construction project, from electrical contractors and plumbers to woodworking and framing specialists. Despite these challenges, we've seen a four percent increase in nonresidential construction labor employment, particularly in specialty trades like electrical, plumbing, and carpentry over the past year. This may allow firms to complete build-outs more efficiently and potentially introduce more competitive pricing. However, with many contractors focused on the growing demand in the data center market, law firms might experience upward cost pressure as they may need to offer higher rates to secure contractors for their projects.

While the costs of materials, the second largest driver of costs, have come down from their all-time highs, raw material costs remain significantly higher than five years ago. For example, the cost of cold rolled steel—used in producing doors, window frames, furniture, fixtures, and metal framing—remains 50% higher than five years ago despite prices dropping by 14% from last year and considerably from its peak in November 2021. Similarly, the cost of gypsum (drywall), commonly used for interior walls, ceilings, and soundproofing, has increased by 55% over the same period and has not decreased from its 2021 levels.

Finished goods such as office furniture have also surged to an all-time high as of August 2024, with prices escalating by 35% over the last five years. This increase is driven by changes in raw materials costs and shifting furniture preferences, as law firms now demand more sophisticated, flexible furniture. Sit/stand desks and more ergonomic, functional options are considerably more expensive than the simpler furniture of times past. Additionally, appliance costs, including heating systems, air condition units, and commercial refrigerators/freezers, have risen by 44% in the last five years.

Many of the more volatile aspects of the market have calmed down. During the pandemic, there was a worldwide bottleneck in transporting construction materials and many other products. From 2021 to 2022, ING Research reported container spot rates increasing from $2,000 to over $15,000 per container. Shipping space was so limited that ships were being built rapidly to meet demand. As a result of this capacity increase and cooling demand, international shipping has returned to approximately $3,000 per container and is at a level where it meets demand.

Another area that continues to affect costs is the rampant industry consolidation that occurred in every supply market, including those for doors, carpets, light fixtures, and mechanical equipment. This onslaught of consolidation and the resulting reduction in the competitive landscape has contributed to costs remaining at their current elevated levels..

 

TF: Are there specific sectors of the construction market that experience increases differently?

DF: Absolutely. In an average law firm construction project, the cost of concrete might not be as significant, but as I mentioned before with raw materials, the price of steel plays a major role in the extensive framing required for tenant interior work. Similarly, copper, widely used in electrical wiring, HVAC systems, and plumbing, has seen a 51% price increase over the past five years. In contrast, the carpet industry is more affected by the cost of oil. When oil prices rise, the cost of downstream products like synthetic fibers in carpets also increases.

Other materials, such as wood veneers used in paneling and furniture, can experience significant price fluctuations. Design choices become critical in these situations, as the selected materials can drive up costs. Materials that are fashionable or limited in supply could end up costing more. Broadening design specifications to include materials with better price points could have a major impact on your budget.

As an example, many law firms use glass partitions for their office walls, which are offered by several manufacturers and provide different levels of performance. Firms must determine how they need the glass to perform. Should it offer basic sound resistance, or do they need soundproofing? If there is flexibility in specifications, firms can increase competition among manufacturers and potentially lower their costs.

It’s also beneficial to leverage design approaches from outside the legal sector as well. By doing so, firms can create flexible, well-designed spaces that can be updated or improved over time.

Design is even more important today because the demands on office space have evolved. It's no longer just about a heads-down workspace. Modern office spaces need to accommodate technology, hospitality, and collaborative spaces, such as outreach areas, podcast studios, and flexible shared workspaces, which tend to be more expensive than typical office space.

TF: How well do national indices translate to local markets?

DF: Construction is very much a local business, and if you're a national or international firm with a large office portfolio, you'll notice that the cost to build office space in Singapore is vastly different from the cost to build in Atlanta. National indices tend to be very broad and, therefore, not particularly useful when assessing the cost of constructing an office in a specific local market.

Construction is very much a local business, and if you're a national or international firm with a large office portfolio, you'll notice that the cost to build office space in Singapore is vastly different from the cost to build in Atlanta.

Dave Fletcher

For instance, in Washington, D.C., the hard costs for tenant build-outs—excluding design, furniture, and technology/AV—range between $220 and $280 psf for high-end projects, while medium-finish projects cost between $160 and $210 psf. In comparison, a similar high-end build-out in New York could cost between $260 and $350 psf.

Moreover, the size of the space, the building it occupies, and the level of design all play crucial roles in determining the total cost. This is why it’s always important to have local experts on the ground who can provide insights into what to expect as you embark on a construction project in a specific market.

TF: Talk about technology’s impact on construction, cost implications, and whether AI or robotics can solve labor shortages.

DF: One of the emerging technologies making waves in construction today is integrated construction, which uses tools like Building Information Modeling (BIM) to coordinate and execute complex projects. Whether you’re constructing a power plant or a stadium, BIM allows for incredible global collaboration, ensuring projects are executed with precision. However, this technology is often too costly for the typical law office interior fit-out and exceeds the scope of what’s needed. That said, as BIM becomes more common in other sectors, we expect it will eventually filter down into the tenant fit-out world.

Another important area where technology plays a pivotal role is energy consumption. Increasingly stringent local and federal regulations are driving the need for smart building technology aimed at reducing high-voltage power usage. This propels innovations like Power over Ethernet (PoE), which allows data and power to be delivered through a single Ethernet cable. By utilizing PoE lighting and low-voltage workstations, law firms can achieve energy efficiency while reducing the need for costly electrical work.

The evolution of technology infrastructure has also reshaped construction costs. We no longer see massive server rooms with generators and redundant cooling systems in law firms. As cloud technology and information security have advanced, infrastructure costs focus more on communications networks than storage. Modern law firms rely heavily on wireless capabilities, reducing the need for extensive hard cabling but increasing the investment in wireless network infrastructure—essentially balancing out the costs.

As for AI or robotics solving labor shortages, I think that's still a long way off. While some companies are experimenting with robotics in construction, the costs associated with these technologies remain prohibitively high for broader implementation at this stage.

TF: What strategies can an owner employ to control costs?

DF: I believe the best strategy to control costs involves focusing on the three T’s: team, time, and temperament.

The first T is to build a team. A trusted, well-coordinated, highly reliable, and competent team is essential for managing the complexities of a construction project efficiently.

The second T is time because, in the construction world, time really is money. Having enough time to properly prepare, plan, and manage a project is critical. The more time you allow for proactive planning, the better positioned you are to take advantage of opportunities and avoid costly reactive decisions.

The third T is temperament. Managing your temperament, removing your ego from the process, and being open to listening to new or better ideas can yield opportunities for significant cost savings and improved project performance. Every tenant construction project is a custom job, and challenges inevitably arise. The key is to approach those challenges knowing that solutions will be found—they may not always be easy, and you might have to adjust your original plan along the way, but flexibility can often lead to better outcomes.

I believe the best strategy to control costs involves focusing on the three T’s: team, time, and temperament.

Dave Fletcher

TF: Is there any chance prices will come down, and under what circumstances would that occur?

DF: In classic economics, surplus and competition drive prices down. For prices to decrease, there would need to be an excess of products like doors, lights, and other materials sitting around waiting to be sold. However, that’s no longer the case in today’s world. Products are now typically manufactured on demand, meaning surplus inventory isn’t available for discounted prices. This manufacturing trend tends to keep product prices either stabilized or increasing.

Competition can also push prices down, but industry consolidation and high labor costs have reduced competitiveness, keeping construction prices elevated. Prices may decrease if and when contractors adjust their margins, but these reductions rarely stem from decreases in employee hourly rates. When the market slows, contractors or subcontractors often compress their margins to keep their staff employed and avoid the high cost of rehiring when demand picks up. It's hard to predict exactly when the cycle will turn, but a good project manager can help you time the market effectively to take advantage of these opportunities when they arise.

TF: Law firms still need nice space. Are there ways they can reduce costs without negatively affecting the space's appearance and operations?

Assembling the right team of advisors is key to understanding and managing costs. With a strong team, the firm can financially model the project well in advance and clearly communicate cost goals to the design team before the design begins. This level of advance planning significantly reduces the risk of cost overruns.

TF: What advice can you give law firms about what they can do to make the design and construction process go more smoothly?

DF: Law firms must be upfront about their requirements to enable smart decision-making throughout the project. Each firm is different, so having clear, defined requirements is critical. If your firm is unclear about its needs or requires assistance, it’s important to assemble a team and take the time to define those needs effectively.

The advisors you bring on board should understand the unique requirements of law firms and have experience building office spaces for legal practices. You need advisors who will listen to you, respond to your input, and collaborate with you—rather than dictating how a law firm space should be built. Ultimately, you want someone who will partner with you throughout the process to create a space that works for everyone.

Assembling the right team of advisors is key to understanding and managing costs. Law firms must be upfront about their requirements to enable smart decision-making throughout the project. Each firm is different, so having clear, defined requirements is critical.

Dave Fletcher