As build out costs continue to rise, New York tenants are getting record Improvement allowances
New York City has one of the highest costs associated with Building space in the country. This and aging real estate assets, has owners handing out record high improvement allowances to tenants.
In today’s competitive business world, the “one size fits all” office space has been rendered obsolete. Nowadays, every work station, conference room and café can be designed to directly support flexibility, mobility and ultimately, overall employee experience. It is extremely rare for an organization in search of commercial space to find any option that is pre-built to fit its culture and talent, and most spaces need at least some level of construction. The costs associated with building out an office are usually considerable and can include everything from design and engineering to furniture and fixtures along with IT costs. One would expect that cities with the highest rent would force businesses to pay the highest out-of-pocket cost to build out space, but that is not necessarily the case.
Choosing the right location for a new office is always a multi-faceted job, and understanding market trends in building costs allows an organization to make the most informed decisions. The trend that has taken over the Manhattan real estate market is the influx of new properties. Approximately 11.7 million square feet of new office space is being built in New York City, with only half currently committed to tenants. With the demand for new construction on the rise, older blocks will become available as tenants relocate to more modernized buildings. To counter this, landlords are offering historically high concessions to incentivize tenants into signing leases at older buildings. This has resulted in billions of dollars being invested in Manhattans aging office locations.
New York City has one of the highest rental rates per square foot in the country and the costs associated with build-outs can be similarly steep. In order to vie for tenants, New York landlords are offering tenant improvement packages generous enough to bring the market down significantly. The average T.I. allowance in the United States is around $43.00 per square foot, while the average allowance in New York is around $48.00 per square foot. This difference helps landlords attract tenants to buildings that are older or will require significant changes to the build out. In fact, the tenant improvement allowances in Manhattan are so high that they have dragged the average out of pocket costs for organizations renovating space below the surrounding boroughs, including the suburban areas such as Long Island.
In New York, the conversation around office space is shifting. It is now as much about the quality of space being built as it is the costs to build it. Evolving demands of technology, connectivity and culture are shaping the new office product, which is shifting the power dynamic in New York real estate. With tenants flocking to newer buildings, owners of older space are being forced to concede more in securing tenants for their vacancies. This has given tenants more flexibility in designing space, and has allowed them to update Manhattan’s aging real estate.