The Rise of Tenant Improvement Allowances

The demand for tenant improvement projects is on the rise within the commercial real estate sector as companies face increasing pressure to create office spaces that motivate employees to return to the workplace. In response, landlords have begun offering tenant improvement allowances and other incentives, such as free rent, in hopes of attracting more tenants.

Understanding tenant improvement allowances, how they are calculated, and their implications for the future, is crucial for navigating the evolving commercial real estate landscape.

What are Tenant Improvement Allowances?

Tenant improvements allowances (TIAs), also referred to as fit-out or build-out allowances, are a predetermined sum of money a landlord gives to a tenant. These funds are put toward the costs associated with customizing the leased office space for the needs of the tenant’s business.

TIAs are typically calculated on a per-square-foot basis. For instance, if a landlord offers an allowance of $15 per square foot for a 50,000-square-foot building, the total allowance would amount to $750,000. Property owners don’t usually require tenants to repay the TIA, but they often account for the allowance by adjusting the base rent or extending the lease term to recoup the funds over time.

Why are TIAs on the Rise?

The increase in remote work since the onset of the COVID-19 pandemic has led many companies to reconsider their office space needs. As organizations roll out formal return-to-office policies, they also recognize the need to make the office environment a more attractive, welcoming, and productive space for their employees. Employers have begun adding social and wellness spaces, fitness facilities, and outdoor amenities to minimize work-life friction. By offering TIAs, landlords incentivize tenants to lease space in their buildings, and also give tenants the opportunity to make significant workspace improvements to attract their workers back into the office.

Additionally, the current market now favors tenants, with declining rental rates allowing them to secure better deals. TIAs have become a key bargaining tool, as businesses seek larger allowances to cover improvement costs. In response, landlords are offering higher TIAs to lock in long-term leases and maintain steady revenue, even with rent adjustments.

Examples in the Market

Prominent office building markets like San Francisco and New York serve as case studies for the increase in tenant improvement allowances. In San Francisco, TIAs have nearly doubled since the beginning of the pandemic, with landlords offering up to $32.50 per square foot, reflecting a 60% increase compared to pre-pandemic rates. While tenant improvement allowances in San Francisco may eventually decrease as the market stabilizes, landlords should anticipate that concessions will remain in place for the next few years until more employees return to the office.

In Manhattan, office tenants are receiving an average of 24% of their total rent as concessions, including TIAs. In New York City, TIAs were averaging $145 per square foot in 2023, according to CBRE data; whereas in 2019, TIAs stood around $104 per square foot.

What Will TIAs Look Like in the Future

In the past, TIAs have tended to rise during times of economic slumps and experts anticipate that the current market will continue to favor tenants in the near future. According to Chris Okada, CEO of New York City’s Okada & Co, in the past few years, rents have consistently declined while additional tenant benefits have consistently increased. He further explained that tenants who are willing to pay a lot of money are recognizing their advantages and using them as a bargaining chip to negotiate better deals.

In the future, the dynamics between landlords and tenants in the office space sector will continue to be influenced by the ongoing shifts between remote and hybrid work, and return to office policies.

The Hidden Costs of TIAs

Landlords are facing increased pressures to offer competitive terms in a tenant-favorable market, but traditional tenant improvement allowances (TIAs) can be limiting. TIAs have a rigid structure and a landlord-controlled process. Tenants often have little flexibility in how funds are allocated, and negotiations over allowances can be time-consuming, resulting in delayed projects. Additionally, TIAs may not cover the full cost of improvements, forcing tenants to secure additional financing. Since TIAs are tied to leases, tenants may also face restrictions on customizing their space to suit long-term needs. These limitations can create inefficiencies, restrict tenant control, and complicate the overall leasing process.

A Better Way

At Dolfin, we offer a more flexible and tenant-focused solution for funding improvements than TIAs. Tenants work directly with our team to receive unsecured, long-term financing based on their credit rating rather than negotiating allowances that often obscure the true cost of capital and can tie up available cash. Our innovative leasing structure for TI projects offers financial freedom to our clients – allowing them to create the office environment they need to drive their business forward while also conserving their cash reserves for higher-value investments.

For more insights on enhancing your office environment and supporting your workforce without straining your cash reserves, contact Dolfin. We can help you access the funds necessary to create engaging and productive workspaces that help drive your business forward.