How tenant incentives are reshaping the US office market
The cost of building out an office can be considerable, with the average U.S. project clocking in at $196.49 per square foot, including everything from design, architecture, and engineering, to furniture and fixtures, to audio-visual, security, and IT costs.
You might expect the most expensive place to set up shop in a new office would be the one with the highest rents.
This would make New York’s Midtown the dubious winner, with its $194 per-square-foot rates and status as the third most expensive office market in the world after Hong Kong ($302) and London’s West End ($197).
But there’s more than meets the eye when it comes to the cost of converting outdated office space into an engaging workplace of the future.
Today’s ever-more competitive business arena has rendered one-size-fits-all office space obsolete. Nowadays, every work station, huddle room, and cafe can be designed to directly support flexibility, mobility, and ultimately, the employee experience as a whole. But that doesn’t mean that they have been.
“It’s rare for an organization to find office space that’s already optimal for its unique culture and talent,” says Todd Burns, President of Project and Development Services at JLL. “In fact, more than 85 million square feet of U.S. office space leased last year will need some level of construction.”
And that comes with a price tag. Although the figures come down to a company’s needs and vision for the space they occupy, the cities in which the offices are located also have a big impact on the final cost, according to JLL’s inaugural U.S. Fit Out Guide.
The cost of building out an office can be considerable, with the average U.S. project clocking in at $196.49 per square foot, including everything from design, architecture, and engineering, to furniture and fixtures, to audio-visual, security, and IT costs. After landlords pitch in another $43.61 per square foot in tenant improvement (TI) concessions, those out-of-pocket tenant costs drop to $152.88 per square foot nationally.
Indeed, different tenant concession packages have the power to substantially change the bigger leasing picture for companies across the U.S. “We expected the California Bay Area to top our list of most expensive places for build out, and the South to be on the more affordable side,” says Mason Mularoni, Project and Development Services Research Analyst. “Those predictions played out in the numbers. But the X factor—the range of tenant improvement allowances we uncovered—turned up some surprising findings, too.”
Consider, for example, New York City, where rents and build out costs are the nation’s priciest. “Tenant concessions are the game-changer in Manhattan,” says Burns. “To vie for tenants, landlords are offering TI packages generous enough to bring the market down to fifth on our list.”
On the other coast, however, the nation’s most expensive build out market is Silicon Valley, California, where out-of-pocket build out costs stand at $199.22 per square foot.
After studying build out costs and TI trends in 51 U.S. markets across 17 industries, the JLL research uncovered some surprising results:
The most affordable spot is Washington, DC
Despite its high office rents, the nation’s capital is also home to the most inexpensive build out costs, with a combination of slightly-below average build out costs and record-high TI concessions bringing tenant costs down to $103.88 per square foot.
Detroit is amongst the nation’s most expensive place
A burgeoning tech scene is helping fuel new investment in the Motor City, but companies looking for office space need to have deep pockets. The Motor City ranks eighth in the list of most expensive cities to set up a new office in the U.S., with high build out costs and low TI offerings making it even more pricy than Chicago and St. Louis.
Los Angeles is cheaper than you think
While California cities occupy four of the most expensive places for build out, Los Angeles is actually among the least. The sunny city ranks at sixth least expensive, with enormous TI packages tied with those in DC as the nation’s largest.
Long Island is pricier than Manhattan
As the nation’s third most expensive place to build out, this suburban New York market is even pricier than the City itself, primarily due to less substantial TI packages.
Though it’s one of the most expensive office markets in the nation, Seattle landlords offer the second most generous TI package in the nation, helping make it the seventh most affordable city for an office build out.
Choosing the right location for a new office is always a multi-faceted job. However, by understanding the market trends in build out costs, organizations can make more informed decisions as they go about looking for the right space to do their business.