Construction costs are climbing again across the U.S. office sector, with new tariffs now turning up the pressure. For landlords and tenants already strained by years of inflation, the 2025 environment has become a balancing act between what’s affordable and what’s simply unavoidable.
According to the latest joint analysis from Savills and CompStak, tenant buildout expenses have continued their relentless rise this year—even as tenant improvement allowances have hit a ceiling after nearly a decade of escalation.
Weighted TIAs, the report shows, have surged 112% from 2016 to 2025, peaking this year at record highs. Yet the pace of increase has slowed for four straight years, suggesting landlords may have reached their limit in subsidizing fit-outs. The explosive double-digit gains of 2021 and 2022 have faded to a modest crawl through 2023–2025. Still, today’s allowance levels remain far above pre-pandemic norms—a testament to how costly modern office conversions have become.
Tariffs Ignite Fresh Cost Inflation
Adding to the strain are the tariffs enacted in April 2025 under the Trump administration, which have quickly rippled through the construction supply chain. The Producer Price Index for inputs to nonresidential construction—a key measure of material costs—has climbed for eight consecutive months through August. Though still below its June 2022 peak, the renewed upward trend signals that material inflation is far from over.
Steel, glass, aluminum, and lumber are among the hardest-hit imports. Higher duties on these materials have introduced fresh volatility for developers and contractors already dealing with supply chain hangovers. Savills notes that U.S. domestic production simply can’t fill the gap left by restricted imports, deepening the mismatch between what landlords can offer in allowances and what those dollars actually buy.
Development Slows, Competition Shifts
The firm warns that tariffs could further chill the construction pipeline, widening the divide between premium and secondary assets—particularly in a market already split by access to capital and leasing demand.
On the supply side, the slowdown is unmistakable. Only 31 million square feet of new office inventory was delivered in 2024—a 42% drop from 2019 and the lowest annual total in more than a decade. Few projects are breaking ground, and most that do require heavy preleasing commitments.
That scarcity has sharpened competition for high-quality space. In gateway markets, trophy assets are regaining leverage, while owners of aging or mid-tier buildings are being forced to offer higher TIAs to lure tenants.
Leasing Activity Rebounds
Despite these headwinds, leasing activity is stirring. Savills data shows that 115.3 million square feet was leased in the first half of 2025—up 14.5% from the same period last year. The uptick suggests tenants are once again planning for the long term, and many are choosing to relocate rather than renew.
“Stay versus go” decisions have tilted decisively toward the latter: 74% of large lease transactions this year involved relocations or new leases. Those moves often trigger major buildouts, adding yet more pressure to the TIA equation. Still, Savills cautions that if economic conditions worsen, occupiers may swing back toward renewals and less capital-intensive projects.
Debt Stress Deepens
Behind the scenes, financial strain in the office sector continues to build. The volume of distressed office CMBS debt has reached its highest point since 2012. Trepp reports nearly $85 billion in loans now categorized as watchlist, special servicing or delinquent. The office delinquency rate hit 11.7% in August, the highest in Trepp’s 25-year history—up nearly 370 basis points from a year earlier. Urban offices make up about two-thirds of that distress, a troubling sign for landlords whose access to capital is tightening just as tenants demand more.
Longer Leases for Bigger Buildouts
The link between TIAs and lease term lengths has also strengthened considerably. From 2016 to 2020, Savills found the correlation between the two at 0.55; between 2021 and 2025, that figure climbed to 0.76. The message is clear: the larger the allowance, the longer the commitment. In quarters with the richest incentives—such as early and mid-2025—lease terms tended to stretch longer, underscoring a renewed focus on stability and asset quality over short-term flexibility.
A Market in Two Speeds
Savills and CompStak conclude that the office sector is now operating in two distinct gears. Well-capitalized landlords with prime, well-located buildings can sustain strong incentives, buoyed by leasing momentum at the top of the market. Owners under debt pressure or holding older assets, however, face tougher choices.
As tariffs, financing costs and tenant demands collide, construction pricing remains volatile. Even at historically generous levels, tenant improvement allowances are struggling to keep pace with what it actually costs to build—and what tenants expect to occupy.
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