Sky‑high TI costs
San Francisco and San Jose are now the country’s most expensive markets for office build‑outs because union labour, high local wages and energy rules have pushed improvement costs up. That changes deal math: landlord‑delivered improvements and second‑generation, plug‑and‑play space become materially more valuable than raw shells. (bisnow.com)
A raw office floor in San Francisco can now be more expensive to finish than in Manhattan, Chicago, or Los Angeles, which is why brokers are suddenly treating working kitchens, conference rooms, and wired desks like gold instead of wallpaper. Bisnow reported this week that San Francisco and San Jose have become the most expensive U.S. markets for office improvements. (bisnow.com) “Office improvements” means the stuff between concrete and move-in day: walls, ceilings, lights, air systems, wiring, bathrooms, and the glass boxes people call conference rooms. CBRE says office fit-out budgets across North America kept rising in 2025, with San Francisco tied for the steepest year-over-year jump at 15%. (cbre.com) CBRE put the 2025 national range for law-office fit-outs at $274 to $456 per rentable square foot, and San Francisco sits at the top end of western U.S. markets in its regional guide. When the shell is empty and the rent term is short, that construction bill can rival a year or two of rent. (cbre.com 1) (cbre.com 2) The Bay Area cost stack is unusually heavy because labor is expensive before a single light fixture arrives. CBRE and Turner & Townsend said 2025 fit-out costs were being pushed up by labor shortages, higher material prices, and tariff pressure on finished products and supply chains. (cbre.com 1) (cbre.com 2) California also makes the mechanical and electrical side of a build-out more demanding than in many states. The California Energy Commission’s 2025 Energy Code, which applies to permit applications filed on or after January 1, 2026, tightened rules around efficiency, ventilation, and building decarbonization. (energy.ca.gov 1) (energy.ca.gov 2) San Francisco and San Jose both shifted to the 2025 code set on January 1, 2026, with no grace period for new permit applications after that date. That means a tenant improvement package drawn under older assumptions can need redesigns, new equipment choices, or extra compliance work before construction even starts. (sf.gov) (sanjoseca.gov) That is why second-generation space is getting repriced. A suite with existing rooms, distribution, and code-compliant systems can save months of permit time and a large share of the capital bill compared with a cold shell that needs everything from framing to final wiring. (sf.gov) (sanjoseca.gov) Landlords feel it too, because tenant improvement allowances now buy less construction than they did two years ago. CBRE says fit-out costs rose 6% in 2023, 5% in 2024, and 7% in 2025 on average, so a concession package that once delivered a polished office may now only get a tenant halfway there. (cbre.com) The result is a quiet flip in office leasing math. In San Francisco and San Jose, the premium is moving from the empty floor plate to the already-built room, because drywall, ducts, and electrical work have become expensive enough to change which vacancy is actually cheaper. (bisnow.com) (cbre.com)
