With New York Office Buildouts, the Burden Now Falls to Owners

As a principal at Williams Equities, Michael Cohen controls around 4 million square feet of office space in New York City.

Describing his spaces as “the As of the Bs” — meaning, the best Class B office spaces money can lease — he is very familiar with what’s involved in building out recently leased space, commonly known as tenant buildouts. 

And what’s mostly involved in buildouts these days are the buildings’ owners.

“The days of signing a lease and handing a tenant cash and saying, ‘You do the work,’ are over,” Cohen said. “They have been for years, and they appear to be for the foreseeable future.”

New York office owners had a stronger hand in lease negotiations in the years immediately preceding COVID-19 and the popularization of hybrid and remote work. Given that, buildouts were frequently handled by the tenant, who was often handed a per-square-foot allowance and wished well.

But the turmoil in the office market over the past five years has drastically shifted the owner-tenant balance of power. 

Now, tenants expect office owners to not just fund buildouts but to also fully handle the executions, while owners take the approach that once a prospective tenant — with solid credit and other financials, of course — is on the hook, they need to do whatever it takes to reel in the deal.   

Cohen said that shifting the traditional responsibility of buildouts from tenant to owner allows tenants to avoid the headaches that come with managing a construction project — especially if that’s not in the tenant’s traditional skill set — while also shifting the financial risk in the owner’s direction. 

“If I give a tenant $100 a foot in improvements, and he spends $150, that means he pays the $50,” said Cohen. “Whereas if we agree on a line drawing and a building standard, and I say to the tenant, ‘That’s fine, let’s attach it to the lease and we’ll build it for you,’ the tenant knows that the economic risk of that construction falls on the landlord.”

Genci Sela is the president of Phase 3 Interiors, a construction management and general contractor firm founded in 2004. Sela said that at least 90 percent of his firm’s work consists of tenant improvements (TIs) or commercial buildouts for landlords such as RXR, Paramount Group, BXP, Brookfield and Cohen’s Williams Equities. 

Sela confirmed that the change from working for tenants to almost exclusively working for owners has been stark, caused by the shift in the tenant-owner balance of power.

“Up until COVID, [office was] a landlord’s market. Now it’s a tenant’s market,” said Sela. “Until COVID, there was no space. A prospective tenant walked into a building, and there were 30 other offers for a space. If a tenant had office requirements, the landlord would give them a new AC unit or something, but when it came to the buildout, that was usually on the tenant.”

But now that so many owners need to secure any potential lease deal that walks through the door, completely funding and handling any desired tenant buildouts is considered a requirement to close these deals. 

“If a tenant walks in, you say, ‘What do you need?’ They say ‘A, B and C,’ and you make sure you give it to them because otherwise, there are so many options,” said Sela. “In the past five years, the buildout cost has gone completely to the landlord. It’s very rare that we do a buildout for the tenant.”

Matt Astrachan, the vice chairman of leasing and tenant representation at JLL, said that not too long ago, this responsibility might have been less burdensome for building owners.

“When interest rates were low, landlords were happy to fund more capital because they were getting a premium on their cost of capital in a higher rental rate, and that would be accreted to the building’s value,” said Astrachan, who added that owner enthusiasm has shrunk as interest rates have risen. “That market cycle turned on its head when capital got much more expensive, and landlords started to go, ‘Well, I want to throttle that back.’”

By that point, however, tenants held the stronger market position, as supply for certain asset classes flooded the market.

“Tenants were saying, ‘I don’t really get a great return on buying sheetrock. I’d rather have the landlord bear as much of the expense as they can,’” said Astrachan. “That’s led us to where we are now.”

Elizabeth Hart, Newmark’s president of leasing for North America, said it has long been standard for landlords to handle buildouts on the smaller side. With the trend of New York leases shifting toward smaller spaces, as recently reported in Commercial Observer, it would follow that landlords are handling more buildouts than ever before for that same reason.

“The bulk of transactions in the United States are 10,000 to 15,000 square feet, and tenants often do not have the infrastructure to execute a buildout from scratch,” said Hart. “The landlord is better equipped to do that.”

Mike Nathan, the chief investment officer of office for the real estate investment and management firm Harbor Group International, said that the size of the tenant also plays an important role in determining who will lead the buildout.

“Smaller tenants don’t want to go through all the procedural requirements of getting a space built,” said Nathan. “So a lot of times a landlord will build out a smaller space versus for a [larger] tenant. Larger tenants like to build out their own spaces, and then [the owner is] providing more of a tenant allowance.”

While the shift from tenant-run to owner-run buildouts in most cases is clear, exact trends in increased costs and who they’re most affecting seem harder to pin down.

Overall, due to factors including supply chain and inflationary pressures, as well as rising labor and commodity costs, the cost of buildouts skyrocketed from 2022 to 2023 before leveling off. In New York City, the average cost of corporate buildouts rose 14 percent over that one year, from $187 per square foot in 2022 to $213 per square foot in 2023, according to Cushman & Wakefield. In 2025, that average remained almost unchanged at $212.59 per square foot. All figures cited include hard construction costs only. 

Still, comparing current costs to those pre-pandemic can paint a bleak picture. In its second-quarter U.S. office report for 2025, Newmark noted that tenant improvement allowances (TIs) now average “68 percent above pre-pandemic levels across leading office markets, which has had the effect of compressing effective rents.”

Given the troubled times, many factors contributed to these increases. 

“Supply chain issues were the first thing that started to make things much more expensive, particularly for switchgear and other electrical components of a buildout,” said Astrachan. “Then we had the inflation problem. Those were the two drivers, and then those were followed by a significant uptick in demand and a shortage of labor.”

Keith Reichert, Newmark’s director of research, said that the increases are largely concentrated at the higher end of the market.

“We have definitely seen a higher cost increase in Class A than we have in Class B and C,” said Reichert. “Breaking that down further, we’ve also seen costs increase in the larger size segments of transactions — like 50,000 square feet and up —  and then also, looking across national markets, it’s definitely in the gateway markets where we’re seeing the largest rise.”

Avison Young, in its second-quarter Manhattan office report, cited a record-high gap of $30 per square foot “between Class A base and net effective rents.”

“This widening spread for Class A reflects the substantial concession packages landlords are offering to remain competitive, even as they hold firm on rents,” said the report. 

Still, given the different factors that can influence pricing, good fortune can shift either way. 

Speaking from the tenant advisory side, Jarod Stern, an executive managing director at  Savills New York, said tenant improvement costs are more situational.

“TI allowances are not as generous as they were during the pandemic because with back to office, the pendulum has swung a little bit,” said Stern. “[It can depend on] whether landlords are private or public, the financing on the building and what kind of shape the building is in.”

Stern also noted the negotiability of the improvements, saying that while costs for buildouts might be increasing, it’s his job to ensure that those costs aren’t passed on to the tenant.

“By and large, I am still seeing buildouts in TI packages that are commensurate with their rents regardless of whether construction has gone up, because owners still have to deliver a product,” said Stern. “A good tenant broker will create the competitive set so that the tenant does not see the increase.”

And, from the owner’s side, Hart said that the bonus depreciation clause in the megabill recently passed by Congress will help offset some of the buildout costs borne by owners. The clause allows owners under certain conditions to deduct from taxes the full cost of certain improvements and upgrades, if not the full cost of an asset. 

“It makes far more sense for the landlord to take on [the cost of buildouts] and then have a higher rent premium with the tenant to offset that cost than to have the tenant take it on,” said Hart. 

 Given all this, Phase 3 Interiors’ Sela said that at this point, enough relevant costs have migrated in opposing directions that they balance themselves out.

“When the news was very hot on tariffs, you’d get a notice from a lumberyard saying that metal framing is up 8 percent or something, but nothing impactful,” said Sela. “Keep in mind, rents have gone down. If we were to lease an office in 2019, we would probably pay $70 or $80 a foot where we’d now pay in the $50s. So some of the costs on the material side that have gone up a bit get offset by other costs that have gone down.”

Newmark’s Hart said cost increases for buildouts don’t just keep pace with cost trends nationwide, but also reflect changes in the nature of our collective relationship with the office.

“From five years ago to today, users rethought what the office meant to them from a business perspective,” said Hart. “It wasn’t just about occupying space. It was about how space can drive business outcomes in terms of collaboration, productivity and what they’re trying to achieve. As a result of that, you see far more customization and interest in having a phenomenal space that attracts talent and reflects the brand. That’s definitely going to cost more.”

And, while the price of buildouts has leveled off over the past few years, Astrachan of JLL said the White House’s seesawing tariff policy leaves open the possibility of new increases in the future.

“Now that we have tariffs, it’s going to be interesting to see what that does [to prices],” said Astrachan, “because a lot of the equipment that goes into office buildings comes from outside the United States.”    

But with full responsibility for buildouts falling increasingly on the shoulders of office landlords, many, said Hart, are viewing this as an opportunity to position their buildings in a way that is ideal for the current — and, hopefully, future — demands of the market.

“The landlords that get this right will be the ones that look at tenant improvements and say, ‘Is it just for this tenant, or is it to improve the building beyond this tenant’s lease term?’” said Hart. 

“Say you’re a landlord and someone wants to take an 8,000-square-foot space for four years,” she added. “If you want to turnkey that space and make it look really nice, with polished concrete and a new ceiling grid, you’re not going to be able to justify that improvement for a four-year term. But that’s what the demand is in the market for that specific-sized suite — a four-year term. 

“So, as a landlord, you have to take a longer view and say, ‘If I do the right thing for this building and reposition it in a way that’s meeting the demand, then either that tenant will renew, or I’ll find a secondary tenant that will want those similar improvements.’”

Larry Getlen can be reached at lgetlen@commercialobserver.com.