Landlord provided Tenant Improvement Allowances (also known as TIs or TIAs) have recently experienced significant spikes throughout the United States, as trends in office space and construction environments are emerging, driven by the following factors:
- A significant volume of new inventory has had a major impact to supply and demand dynamics, as available office product is expanding faster than tenant demand. This trend is motivating landlords to compete for tenants with more abundant and generous TI packages.
- An uptick in new development is accompanied by tenants gravitating toward higher-quality space. Landlords of older buildings are responding by offering more generous TI packages to encourage tenants to update and build out their spaces rather than relocating. Conversely, landlords of high-quality developments have been offering expanded TIs to offset the higher costs for first-generation space. Both scenarios are driving the universal expansion of TIs nationally.
- Construction costs grew more than 15 percent over the last 5 years across the United States. As costs for construction materials and labor continue to climb―steadily driving up the cost of an office fit out―tenants expect landlords to pay for a larger portion of the build budget. Major markets that have been especially hit with rapid construction cost growth include New York City, Chicago, Los Angeles, Boston and San Francisco. Each of these markets are among the top 10 markets nationally with the largest TI packages.
- Over the past several quarters, large TI packages have helped landlords offset peak rents and premium pricing for new construction. Landlords are leveraging TI packages to sweeten the economic terms for tenants. While the face value of a transaction is increasing, TIs help to maintain the net effective rent in leases.
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