When renting commercial real estate, different types of buildings are often in different stages of development. Sometimes, you’ll hear the phrase, “shell condition,” to refer to commercial property that encompasses two different types of unfinished construction: vanilla shell and grey shell.
In commercial real estate, shell condition refers to a space’s interior condition when the tenant takes it over for lease, said James Huang, President of eXp Commercial. In shell condition, the exterior is already built, Huang explained, but the interior is “just a box, as we would call it.” Often, this means there’s no HVAC, no electrical, “just an empty shell.” However, there are different types of shell conditions in commercial real estate, and each one represents a different level of building completion. “You go from fully built out on one end, and grey shell is on the opposite end, vanilla’s in the middle,” said Jason Keyz, CEO and Principal Broker at KEYZ Group, Inc.
When a commercial building is in grey shell condition, it’s “pretty empty” or “one step above empty,” Huang explained. A grey shell space is unfinished and may come with bare stud walls, unfinished floors, exposed wiring, and no plumbing or electrical. Sometimes, Huang said, you may find some internal electrical and HVAC. “I sometimes call it ‘on sticks,’” Keyz said. “Like when you walk in and you can literally see the exposed beams, the wood and the two-by-fours — everything.”
Vanilla shell, on the other hand, is a bit more built up than grey shell. With vanilla shell, Huang explained, you’ll see that the building’s internal structure — its electrical and HVAC — is now covered up with drywall. Unlike grey shell, there are no wires exposed.
The main benefit of leasing a building in shell condition — whether that be grey shell or vanilla shell — is that tenants can customize the space however they want, Huang said. “Some people have very specific needs and wants,” Huang said. “They like shell so they can build it out.” Keyz noted that for tenants like restaurants or anybody else who has custom needs — like a dentist who needs plumbing in every room, or a cell phone retail store that needs a hundred outlets throughout the store — grey shell is beneficial because they can build the space exactly the way they want it. In addition, grey and vanilla shell spaces are generally offered at a lower rate than fully built-out spaces, Keyz said.
Despite the benefit of customization, shell condition buildings can also have a number of drawbacks. With a grey shell building, “it’s literally given to you almost as raw as you can get,” Keyz said. Tenants are then left to do a number of tenant improvements, which can take a good amount of time and be somewhat costly. Landlords usually pay for tenant improvements as agreed upon in a commercial lease, but sometimes the costs of those improvements exceed the tenant improvement allowance. When that overage happens, the tenant must pay the difference.
Tenant improvements include walls, HVAC, electric, plumbing, paint, carpets, windows or doors, and other hard and soft costs. They do not include miscellaneous expenses specific to an individual tenant’s needs. Landlords typically will not pay for an expense if the improvement will not be beneficial to the next tenant who might occupy the space.
For office spaces, tenants want vanilla shell condition because they just need plain white walls, standard outlets and standard carpet or flooring, Keyz explained. “It’s ready to move in,” he said. Huang added that, in addition to offices, some buildings that lease in shell condition include retail and industrial buildings.
A shell lease is a commercial real estate agreement for a shell condition building the tenant will customize, often with a tenant improvement allowance from the landlord.
When renting a property in shell condition, it’s important for both the landlord and the tenant to be very clear about what type of shell condition they’re referring to. “We ran into this issue just recently with the tenant where they thought they were getting it in vanilla, but it was actually being delivered in grey,” Keyz recalled. “And they’re going, ‘Well, there’s no walls, there’s no electrical, there’s no anything.’” For this reason, make sure to do your due diligence before entering a lease agreement. Consult with a commercial real estate expert or broker to better understand what type of shell condition you’re getting and what the terms of your lease are.
