MARKET INTEL: NYC’s Record Rise in Tenant Improvement Values

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Rising Construction Costs

Work Values Up Across New Construction, Class A and B Buildings

Expanding Work Values Taking A Bigger Piece of Overall Lease Value

In the hybrid work era, office space quality is king—tenants are seeking and signing onto better buildings and nicer spaces, especially in New York City, as part of an effort to attract employees back to the office. While “quality” can vary from meaning prebuilt space, access to outdoor terraces, new construction to renovated space or more, one thing is true—construction and material costs are significantly more expensive than pre-pandemic. In combination, a preference for quality and rising construction costs are driving up work values to new heights in New York City.

NYC’s Average Work Values Up for Seven Consecutive Quarters

Average work values in New York City direct office transactions are up by 38.0% from the end of 2019. Work values dipped during the onset of COVID-19 in 2020 as major deals came to a halt, but have now been on the steady upswing for at least seven straight quarters. While the office market remains strongly in favor of the tenant, this rise is steep. Average work values did not increase in the wake of the 2008 recession. What’s driving this increase in values?

Rising Construction Costs

Rising inflation and continued supply chain challenges have driven construction costs up pushing tenants to demand higher work allowances in office lease transactions and for landlords to provide them in today’s competitive market. According to the Producer Price Index (a combination of indexes that measures the average change over time in the selling prices received by domestic producers of goods and services), the PPI is up 29.3% and 40.4% for services and goods in non residential construction, respectively since the end of 2019. With costs for materials rising faster than the average work value and an 8.2% annual increase in CPI for the year ended September 2022, are average work values even keeping pace with the true costs realized when building out an office space?

Breaking down the PPI by commodity, the data also shows that prices are up significantly for many of materials used specifically in an office build-out from a 45.7% increase for drywall to a 26.6% increase for paint to a 17.4% rise for glass. Landlords and tenants have faced rising costs for many of the key materials needed to build out or improve existing office space.

Work Values Up Across New Construction, Class A and B Buildings

While deals in new construction across Manhattan dominate the headlines, average work values are increasing across all types of office product. CompStak’s data shows that work values are increasing fastest for Class A buildings—they have increased for the last seven quarters and are now up 35.8% since the end of 2019. Meanwhile, average work values are up 31.1% in Class B buildings over the same period, although they dipped significantly during the bulk of the pandemic when leasing activity collapsed.

For example, CompStak evaluated all deals inked with work values at $100 or above from 1Q 2021 to present and found that 48.6% of these deals were inked in buildings constructed or renovated within 10 years of sign date. However, the other 51.4% were not in new construction or recently renovated buildings, suggesting that tenants are receiving higher work values to compete with construction costs and/or to build higher quality or lease prebuilt space.

Expanding Work Values Taking A Bigger Piece of Overall Lease Value

While work values have been on the incline, rents have not kept pace, leading to an increasing share of total deal value attributed to work values since the end of 2020. In 2019, the ratio of work value to average deal value (total value of rent paid during a lease excluding concessions) ranged from 7.3% to 7.9%. Over the last four quarters, this same ratio grew from 8.9% to 11.0%. 

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