Increasing construction costs have prompted office building owners to offer more generous tenant improvement (TI) allowances for tenants who need to fit out their spaces. TI allowances for Class A space increased 7% year-over-year in 2024, according to Cushman & Wakefield’s Office Fit Out Cost Guide.
Four U.S markets saw TI allowances increase more than 20% last year, including San Francisco (+36%), Raleigh-Durham (+36%), Chicago (+37%) and San Mateo County (+57%).
“Despite TI increases in many markets, the allowances being provided to tenants are generally not keeping pace with fit-out cost increases,” said the guide. “Occupiers need to consider that on a net basis, out-of-pocket costs will likely exceed TIs.”
Fit-out costs in the United States rose slightly above average, up 4.7% year-over-year compared with 4.5% across the Americas. In the U.S., fit-out costs varied widely by region. The Northeast and West were more expensive with average fit-out costs of $175 per square foot, while the Midwest was more cost-efficient at an average of $123 per square foot for office fit-outs.
The most expensive markets for office fit-outs last year were coastal, gateway markets including San Jose, San Francisco and New York. These markets exceeded $212 per square foot for fit outs, according to the report.
San Jose topped the list as the most expensive market at $219 per square foot, 51% higher than the average. Despite the high fit-out costs in San Jose, the city saw an 8% decline in these costs equaling a savings of $19 per square foot. The report said this is largely due to decreasing electrical costs. Other California markets, including San Francisco and Sacramento, also saw fit-out costs decrease by 1.4% and 1% respectively.
Meanwhile, fit-out costs increased the most in lower Connecticut on a year-over-year basis, with costs growing $35 per square foot to reach $188 per square foot for total fit-out costs. This increase is driven by higher costs for doors, frames and hardware coupled with mechanical, plumbing and fire protection costs.
East Rutherford, New Jersey, had the largest decline in 2024 for fit-out costs versus the previous year. Costs fell $29 per square foot in the market, due largely to a $14 per square foot reduction in electrical expenses and a $10 per square foot drop in general requirements, general conditions and fees, according to the guide.