Office tenant improvement costs are higher in the Bay Area than anywhere else in the country as the region rides a wave of leasing that has sparked optimism for a continued rebound.

In San Francisco and San Jose, office renovation costs $228 and $224 per SF, respectively, well above the national average of $149 per SF, according to a report from Cushman & Wakefield. Nationwide, these costs are up 5.5% over the previous year.

The Bay Area’s higher rates are driven by labor costs, trade unions, energy regulation and elevated operating expenses, according to Cushman.

Electrical work represents the single largest expense for tenant improvements, at 24% of total project costs. In San Francisco, electrical work for an office fit-out costs $58 per SF, while installing new mechanical systems, plumbing and fire suppression hit $53 per SF.

Fit-out costs continue to rise in San Francisco. Mechanical and plumbing costs for office renovations trended upward to $48.21 in 2025. Electrical work spiked 6.5% from the prior year.

The increases are likely to continue as 2026 progresses, especially if geopolitical tensions and economic uncertainty persist.

More than two-thirds of general contractors surveyed by Cushman & Wakefield expect materials costs to rise slightly over the next six months, and three-quarters of contractors said they expect labor costs to increase.

Tenant improvement allowances across the country rose by 112% from 2016 to 2025, according to CompStak data, with a clear acceleration in landlord spending beginning when the pandemic hit. A Savills report last year indicated that TI allowances had peaked as the office market slowly improved.

But as the flight to quality continues, some landlords, especially in pricier markets like the Bay Area, are still willing to offer larger TI packages to bring in tenants looking for high-end space.

“The project trend is more towards those quality spaces,” Ashley Hart, director of investor services, project and development services for Cushman & Wakefield’s San Francisco office, told Bisnow. “Quality buildings, and then building out a high-quality space — you have to kind of lure [employees] in essentially.”

A slowdown in new office deliveries, coupled with concentrated demand for premium office space, could lead to fewer options in Class-A properties and spur additional leasing activity in older and lower-quality office buildings, Cushman & Wakefield said in its fit-out guide.

The surge in leasing at Class-A office properties — AI companies leased just over 2M SF of office space in San Francisco in 2025, according to Cushman & Wakefield — could lead to a wave of second-generation office fit-out work among vacant Class-B office properties.

Overall first-quarter vacancy for Class-B office space in San Francisco was 30.4%. In Silicon Valley, Class-B office properties were just south of 17% vacant.

However, landlords with vacant Class-B properties that don’t command premium rents may face a difficult value proposition when it comes to initiating capital improvements.

In downtown San Francisco, Class-B offices brought in an average of $60 per SF in the first quarter, according to Cushman, compared with $75 per SF for Class-A and $110 for the highest-quality offices.

“It will be interesting to see what happens to Class-B properties,” Hart said. “Will tenants just not come back, will they wait for buildings to change hands, or will they remain vacant and unamenitized without the investment it may take to get more tenants?”