High Tenant Improvement Costs Driving Longer-term Leases

There are office landlords out in the suburbs who are beginning to resist spending the humungous amounts of office tenant improvements some tenants are demanding, especially for five year lease terms, Tenant improvements that just five years ago may have come in at $25-35/rsf are now pricing at $50-60/rsf. With some of the suburban submarket full-service rental rates at only, for example, $2.50/rsf for a Class A office building on the I-680 Corridor, and with expenses roughly $1-1.20/rsf per month, this leaves $1.50/rsf to service the debt and pay for tenant improvements. If you use 6% for a TI cost of money, amortizing $50 over just a five year term works out just for the cost of Ti’s at $.97/rsf, leaving the landlord a net return before debt service of only $.53/rsf!! Again, not happening across the board, but there are landlords pushing for 7-10 terms to justify the cost of these higher tenant improvemements and I have also heard of security deposit increases and/or tenant contributions towards the TI cost.