As companies continue to view their office real estate as a recruitment and retention tool, the cost to build out those spaces keeps climbing.
That’s according to a recent analysis by Jones Lang LaSalle Inc. (NYSE: JLL), which found the average office fit-out cost is up 2.7% year-over-year for a moderate-style build out of medium-quality finishes. Although an increase, that annual uptick is significantly less than the double-digit cost growth observed the past two years.
The cost to upfit an office in 2024 varies by office type, complexity and quality, as well as geography. Among the major metro areas tracked by JLL, 96% saw costs grow less than 6%. JLL’s analysis took into account 4,900 projects completed by the firm in 58 North American markets.
Across the U.S. and Canada, the average fit-out cost for a medium-quality, moderate office style — which features an open floorplan with small to medium-size workstations, fewer than 20% offices and a 70/30 split between office/workstations and collaborative space — totals $264 per square foot this year. That’s compared to $257 per square foot in 2023, $233 per square foot in 2022 and $190 per square foot in 2021.
Louis Molinini, Americas market lead of project and development services at JLL, said costs have leveled off from the surges observed the past couple of years as inflation more broadly has subsided. While costs haven’t necessarily come down, they’re no longer growing as much or as quickly as they had been.
“The past two years, it’s been sticker shock on a daily basis, but we’re at a point where [tenants] are able to plan and budget accordingly,” Molinini said. “More and more of our clients are coming to us with realistic schedules and budget expectations. It’s a much better situation today than it has been in prior years, when costs were changing so dramatically … [even] on a month-by-month basis.”
Still, even if cost increases have abated, companies today are investing more in their real estate at a time when many also are reducing their footprint or exiting leases entirely. For the offices companies continue to occupy, it’s become typical for them to be replete with amenities, flexible workspaces and the latest technology.
Since so many companies are operating in a hybrid model, it’s become imperative, for example, for virtual meetings to take place in the office, Molinini said. A workplace-design survey by JLL found 19% of workplace activities involved virtual collaboration. It found surveyed workers are in the office on average 3.1 days a week, with Tuesdays and Wednesdays seeing the highest share of in-office work, at 53% and 54%, respectively.
The flight-to-quality trend happening in office-leasing decisions is also rippling down to space design and buildouts, Molinini said.
“Companies want to build spaces that their employees want to come back to work to, whether it’s human-led design, focusing on wellness or sustainability or amenities or technology,” he said. “The challenge is, when people come into the office, they need to have the flexibility to have focus work, in-person collaboration, and they still need to have the virtual collaboration. Designing office space today is a lot more complicated when you’re trying to balance those themes.”
Landlord tenant-improvement allowances are shifting
In the tenant-favorable office market that’s been pervasive since the pandemic, landlords have attempted to retain and sign on tenants by offering lofty concessions, including beefed-up tenant-improvement allowances.
And, thanks to inflation, more elaborate build-outs and a much smaller pool of tenants in the market, owners have gotten more aggressive at their offerings, even when it eats into their income.
A separate analysis by JLL found office REITs — which own about 15% of the U.S. office market — saw their highest concessions ratio ever in 2023, with only slight declines so far this year. Open-ended diversified core funds, which own roughly 10% of U.S. office space, spent $2.2 billion on TI allowances in 2023. That’s 20% lower than the highest 12-month total of TI spend by those funds in 2019, and their concessions spending has also moderated somewhat this year.
According to JLL, 10-year equivalent TI packages have fallen 6% on an annual basis and have averaged about $75 per square foot in the past year.
Still, Molinini said, on the whole, the delta between office landlords’ TI packages and the cost of building out a tenant’s space is growing.
“There are certain markets and certain building types where the gap is much closer than in other markets and in other buildings types, where landlords may not have the ability to offer the tenant-improvement allowance that closes the gap,” he said. “Landlord concessions vary on a market-by-market basis, I would say, a lot more than the project costs vary. But, on average, the gap has been growing. Project costs increased faster than landlord concessions have increased.”
Molinini said landlord concessions are substantially more than they have been in prior years but added much of what tenants are choosing to spend their money on in their buildouts today aren’t necessarily covered by TI allowances, such as furniture and technology.
