At AQUILA, we are often asked what a typical tenant improvement (TI) allowance is for office space in Austin. This can be a difficult question to answer, as TI is highly dependant on a number of variables, including:
- Size of the space
- Term of the lease
- Type of lease (new lease, renewal or expansion)
- Market conditions and more
In this article, we outline typical TI allowances per square foot (SF) for different leasing scenarios in Austin based on AQUILA’s proprietary lease comp database.
Small vs. Large Space
Because a landlord’s goal is to minimize vacancies and maintain rental income, many favor a single large lease over multiple smaller leases. Not only does this reduce the number of negotiations needed to lease the entire building, but also allows the landlord to lock in a rental rate and avoid the risk of market conditions changing in the future.
To encourage a large tenant to sign a lease, a landlord may be willing to offer a more significant TI allowance.
This is reflected in the data, with large spaces of 20,000 SF or more regularly receiving a larger TI allowance per square foot compared to medium and small spaces. This delta has been variable, however, rising as high as a $20/SF difference between large and small space to as low as $12/SF. As of 2018, that difference averaged $16.09/SF.
Short vs. Long Lease
Similar to the way landlords may offer more incentives for a larger lease, many also give preference to long term leases. Long term leases allow a landlord to create stability in a building by reducing turnover and vacancies, as well as allow the landlord more time to recoup their initial out of pocket cost for the TI allowance, making a larger allowance more likely.
As you can see, tenants signing leases greater than 60 months (5 years) have historically received significantly more TI than tenants leasing space for 60 months or less. The difference between long term and medium term leases has even increased in recent years, going from a delta of roughly $13/SF prior to 2013 to a delta of $16.32/SF in 2018, an increase of 25%.
As a general rule, tenants who sign longer leases are allotted higher TI allowances.
TI Allowance for Different Lease Types
The type of lease a tenant signs also has a significant impact on the amount of TI they are likely to receive. If a tenant signs a new lease and is moving into a space for the first time, they are much more likely to make major improvements to the space to fit their needs than if the tenant is already occupying the space and wants to renew. Tenants renewing a lease in their current space usually only make small updates that do not require much TI.
As expected, the data indicates new leases and expansions have historically received the most TI, while renewals and subleases receive less. Also worth noting is that TI allowances for new leases and expansions have increased significantly since 2008 (28% and 72%, respectively), while allowances for renewals and subleases have remained relatively flat. This increase is likely the result of rising rental rates and construction costs.
As of 2018, this difference in growth resulted in a delta of $13.42/SF between new leases and renewals.
Impact of Market Conditions and More
While the above variables are good benchmarks for estimating the TI allowance a tenant is likely to receive in Austin, it should be noted that market conditions and other less noticeable variables also play a major role in the outcome.
Not only could these trends vary by market, but economic factors like supply and demand, interest rates, rental rates and the overall market competitiveness could all influence the outcome of a TI negotiation. Building-level variables have an impact as well, including class of the building, shell space vs existing and more, and even tenant variables like credit can play a role.
Because of this, getting answers to the most important TI questions is vital, especially for a tenant leasing space or moving into a new market for the first time.
As you can see, the specific terms of a deal have a major impact on the amount of TI the tenant is likely to receive, and these variables should be kept in mind during the negotiation process.
|Average TI Allowance in Austin, Texas in 2018|
|Small (0 – 5,000 SF)||$13.64||$16.29||$4.09||$1.36|
|Medium (5,000 – 20,000 SF)||$24.91||$24.70||$7.76||$1.90|
|Large (20,000+ SF)||$34.22||$33.11||$14.73||$3.67|
However, since TI allowances are heavily driven by market conditions, we recommend hiring an experienced tenant representation broker to help narrow down exactly what TI allowance you can expect to receive today.
If you would like to learn more about TI allowances in Austin, check out our Learning Center for articles on common TI questions and when to engage a project manager for your office build-out.