- TI allowances in US office leases have jumped 112% since 2016 but are now slowing, increasing only 8% over the past year, according to CompStak and Savills.
- A shrinking supply of new trophy office space is giving landlords leverage to reduce concessions, while Class-B and C owners face pressure to cut TI and offer longer rent-free periods or lower base rents.
- Landlords are tying TI packages to longer lease terms to stabilize income, especially as higher interest rates and elevated vacancy persist in much of the market.
The Big Picture
Following nearly a decade of rising tenant improvement allowances, office landlords are pulling back, reports Bisnow. According to CompStak and Savills, average TI allowances in gateway markets peaked at $212 PSF earlier this year. However, spending is now slowing, with just 8% year-over-year growth.
Landlords are feeling the squeeze. Capital, labor, and materials costs continue to rise, while higher interest rates and economic uncertainty are complicating financing. In some markets, notably New York, landlords are now cutting back on TI spending even as base rents rise, a signal that demand for high-end office space is giving property owners more leverage.
Trophy VS. Commodity
Class-A trophy owners are cutting TI spending and concessions as leasing activity rises and vacancy rates fall in top markets. In Midtown Manhattan, for example, TI dropped from $162 to $133 PSF year-over-year, while free rent periods declined by two months.
In contrast, Class-B and C landlords are in a tougher position. Rising costs have capped how much they can offer in TI, forcing them to consider alternatives like longer free rent periods or lower base rents. But these strategies can hurt their net operating income and add risk, especially when debt comes due.
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TI Spending As A Long-Term Play
Despite cost concerns, some landlords are still willing to frontload TI spending to secure longer leases. According to CompStak-Savills data, there’s a growing correlation between TI allowances and lease term length. The logic: secure a tenant now, and it’s easier to refinance or renegotiate loans later.
This explains why asking rents continue to rise despite high vacancy—real effective rents remain lower than pre-pandemic levels by about 19%, according to Newmark.
New Rules, New Opportunities
The recently passed “One Big Beautiful Bill Act” adds a new wrinkle. Bonus depreciation now lets landlords deduct full TI costs in the year improvements are completed. For every $100M in TI spending, that can result in $4M to $7M in tax savings—softening the financial hit of upfront investment.
A Divided Market
In strong markets like New York, TI packages may continue to shrink while landlords lean into spec suites and reuse. But in weaker metros like San Francisco—despite rising AI demand—TI remains elevated as landlords struggle with persistent vacancy.
Nonprofits, government users, and other cost-conscious tenants may drive more demand for basic office space. But as some buildings delay major upgrades, those spaces could fall further behind—requiring more expensive renovations down the line.
As Newmark’s Jessica Morin puts it: “If you’re not upgrading with finishes for today’s tenants, you’re just going to continue to bank on the fact that some occupiers just want the physical space.”
Why It Matters
TI spending is both a carrot and a risk. As the office sector continues to evolve post-pandemic, how landlords manage capital expenditures like TI will determine which assets remain competitive—and which fall behind.
