Tenant Improvement Costs Going Up

Authored by: Pete Davisson

Tenant Improvements and TI Allowances are a very serious part of lease negotiations right now. Landlords would generally prefer to negotiate and give additional TI dollars rather than reduce the face rate of the rent. Tenant improvement costs are rising faster than rent according Real Capital Markets. Landlords don’t want to be saddled with the costs and neither does the tenant.

The Reason for the Rise in Tenant Improvements Costs

In the last year and a half, the cost of construction materials has gone up 10-15%.  At the same time, the available labor force has gone down, especially in the technical trades. Most of them are jumping ship to work on the very active residential, senior housing and multi-family projects. Those two facts alone put upward pressure on the cost of construction for Tenant Improvements. It’s one of the reasons why there’s virtually no spec development.

It also doesn’t help that tenants want change as fast as Apple introduces a new IPhone. One of the most common space improvements, called white-boxing, costs anywhere from $50,000 to $100,000. For landlords of older buildings, the cost is even higher to add technological or simply IT infrastructure.  With unemployment hovering at 3.3% in Delaware, developers just can’t find tradespeople to complete the projects.

Co-Working Spaces Impact on Tenant Improvements

Nearly half the US office absorption in 2018 is attributed to co-working spaces Real Capital Market found. While the concept sounds like a win for a landlord, co-working spaces require technological set-up that puts a strain on the technical trades, and many of the older buildings just don’t have the infrastructure to accommodate today’s technology

Plus, the trendy open space concept favored by co-working tenants is now influencing other office spaces. Landlords are feeling the pressure to add the amenities commonly found at co-working spaces: large common areas throughout the building, shared meeting spaces and all the creature comforts such as private telephone rooms and lounges.

Negotiating Tenant Improvements and Allowances

The range of TI allowances is $30.00 – $40.00/sq ft dependent on the size, density and length of term.  A good tenant broker will understand your need, the Landlord’s position and the marketplace. They will make sure to get you the proper amount, here’s more information on how that works: https://www.jacksoncross.com/2015/01/28/changes-in-standard-tenant-allowance/

Authored by: Pete Davisson