Tenant improvement allowances are normalizing, but remain elevated

May 21, 2024
  • Jacob Rowden
  • Elena Lanning
  • With interest rate hikes over the past two years increasing the cost of capital, landlords have been under greater pressure to limit lease concessions, in particular TI allowances, but concessions have only declined moderately as intensely tenant-favorable conditions continue to drive elevated packages.
  • Two of the largest segments of office landlords have pulled back on TI allowances in recent quarters but remain near historic highs. Office REITs, which own roughly 15% of the U.S. office market saw their highest concessions ratio on record in 2023, with only slight declines YTD.
  • Open-ended diversified core funds (ODCE), who own roughly 10% of U.S. office, spent $2.2 billion on TI allowances in 2023, just 20% lower than the highest 12-month total of TI spend ever, which occurred in 2019 when leasing volume was over 30% higher. Similarly, their concessions spending has moderated slightly YTD.
  • JLL’s national leasing database similarly shows a peak and gradual decline in TI allowances in recent months: 10-year equivalent TI packages have fallen 6% year-over-year, and now average roughly $75 per s.f. over the past 12 months.
  • New leases and relocations tend to have higher TI allowances due to tenants’ need to build out space—as options in new construction become more limited, renewal rates are expected to increase, which could drive further declines to TI packages.