Tenant Improvement Allowances Growing As Practicality Rules For Office Amenities
As the new normal for office usage becomes more difficult to deny, office owners and tenants alike are coming to grips with the fact that coming into the office is no longer a given, and perks need to meet the moment accordingly.
More often, this means going beyond the obvious and beyond even what might have been considered generous or groundbreaking before the pandemic. In other words, out with the pingpong table and beer taps, in with childcare and commuter reimbursement.
“We all know that a lot of companies are optimizing their footprint. So, they're reducing their space, but they're spending more per square foot to build it out,” Avison Young principal and Managing Director Damla Gerhart said.
“And part of that is because they want to make sure that if people, you know, they're going to still continue to compete for your commute, that when you get there, it's actually a seamless, easy experience," she said.
But these new types of benefits often cost more than what office users offered in the past, especially in markets like San Francisco where things tend to be pricier and employees are more comfortable doing their work remotely.
Depending on the space and the building, CBRE estimated that landlords can spend as much as $100 to $200 per SF, and in Silicon Valley, the costs can start as high as $150 per SF. The company attributes these amounts to both increased demand and rising construction costs, and it estimates spending has increased by 10% to 20% since 2020.
And as tenant improvement allowances grow, some companies are rethinking the leasing model entirely. Instead of traditional office amenities, tenants these days are interested in flexible office options, Steve Mohebi, co-founder and CEO of coworking provider Canopy said.
"The number one most requested amenity was flex office option," he said, referencing the CBRE survey.
As companies continually look to downsize existing office space, there is growing demand for this type of work environment, Mohebi said.
“The office amenity of yesteryear was basically a gym, showers, lockers, things like that,” he said. “Nobody ... works out at the office. It’s just like such a sham.”
In some cases, as TIs go up, lease terms stretch.
“A landlord is not going to give you a bunch of money to build out your space and then allow you to sign a three-year lease,” Gerhart said. “It just doesn't make sense financially for them.
In these instances, the typical five-to-seven-year lease term can extend to 10 years.
Gerhart said one of the more notable examples of extreme builds she has seen is a full-size basketball court in the 167 Green St. offices in Chicago, which serves as both an amenity for office workers and as an event space.
“They've done a really good job marketing it and putting so much social media around and highlighting photos so that when there are NBA players in Chicago, they'll go and play there,” she said. “When Justin Bieber was here for his Chicago concert, there's pictures of him on Instagram playing on the basketball court at 167.”
Gensler Design Manager and Technology Leader Brian Stromquist said that a lot of amenity spending is going toward upgrading office technology or focusing on sensory experiences.
“So for one client, we've been doing these really robust kind of sensory rooms with kind of like tunable lighting and adjustable A/V and all this sort of like plush materiality,” he said.
“It's kind of that luxury is throughlines for all of this, creating these experiences that feel like slightly elevated than what you'd have at home or a third-party location," Stromquist said.
This sentiment for better technology and overall office experience was echoed by an Essensys survey that indicated that office workers primarily want better WiFi and technology in the office instead of fringe perks like beer or snacks.
UPDATE, DEC. 13, 1:48 P.M. ET: This story has been updated to clarify and add to comments made by Canopy CEO Steve Mohebi.