Landlords aren’t just struggling to fill space—they’re bleeding out trying to build it back.

The new reality in commercial real estate? Every tenant that walks out the door leaves behind a deeper hole—and replacing them isn’t just harder, it’s significantly more expensive.

So, any way landlords bring in new tenants is through one expensive concession package at a time. And the math isn’t in their favor.

In this article, you’ll learn:

• Why rising tariffs, labor shortages, and inflation are sabotaging even the biggest TI packages.
• How interest rate hikes have doubled build-out costs for landlords.
• What’s coming next for concession trends, short-term leases, and creative deal structures.
• What tenants must do now to protect their dollars and deals.

Tariffs Are Fueling a Construction Cost Crisis

As of April 2025, the U.S. has imposed a baseline 10% tariff on all imports, with much higher rates hitting specific countries:

• 34% on Chinese goods
• 20% on European Union products
• 24% on Japanese imports

Roughly one-third of U.S. construction materials are imported—and these tariffs have directly driven up prices across the board.

• The National Association of Home Builders estimates these trade measures have added $9,200 to the cost of building a single-family home. Commercial projects are experiencing similar pain.
• Steel and aluminum, critical to office and warehouse retrofits, have seen volatile spikes, with contractors reporting up to 22% price increases year-over-year.
• Lumber from Canada now faces up to 39.5% tariffs, disrupting supply and raising framing and finish-out costs.

Developers are hitting pause, delaying projects due to cost unpredictability.

And for landlords? Every retrofit now takes longer, costs more, and comes with greater risk.

The problem is that office landlords were already being held underwater. The vacancy crisis that started with COVID and persisted with hybrid work has run through major landlords- leading to billions in defaults from behemoths like Blackstone.

• CMBS office loans are seeing record delinquency rates (over 10% as of May 2025, per Trepp).
• In major markets like Chicago and San Francisco, up to 75% of office CMBS debt is distressed.

And part of this is because when property owners do find tenants to lease their space, they have to put a lot more on the line to bring someone in the door. This has come in the form of over-the-top concession packages, and even soft- cost build-outs…

Bigger Tenant Improvement (TI) Packages… for Less Build-out

TI budgets surged over the past few years—not because landlords suddenly became generous, but because they had no choice.

In a market still bleeding tenants, getting someone to sign a lease meant offering bigger checks and better terms. But here’s the catch: those checks don’t even buy what they used to.

• Since 2019, TI allowances are up 37% for Class A buildings and over 50% for Class B/C.
• But with construction costs rising 4–6% annually, those inflated TI dollars now deliver fewer results. What used to cover a full build-out now barely gets drywall up.

In top-tier markets like Manhattan, Washington D.C., and San Francisco, full concession packages—including TI and free rent—have hit $125 to $150 per square foot. Landlords are dangling 12–18 months of free rent alongside $100+/sq ft TI budgets.

Let’s break down the math:

• A 37% increase in TI since 2019 means a bump—from roughly $71 to ~$97/sq ft for Class A space.
• But build-out costs have increased by 30–40% cumulatively over recent years (e.g., 2022 to 2023 saw ~23% hike).
• Effectively, a $100 TI allowance today buys 25–30% less fit-out value than it would in 2019–2021.

Even worse? Construction timelines have ballooned, plagued by supply chain issues, permit delays, and persistent labor shortages.

That means landlords are not just spending more—they’re waiting longer to get a return on that investment.

The longer the space sits in build-out, the longer they carry interest on construction loans, and the deeper the hole gets.And for landlords already facing loan maturity cliffs or debt service shortfalls, this strategy is financially dangerous.

 These landlords can’t afford to keep up the concession arms race—but they can’t afford not to.

They’re effectively front-loading tenant costs with capital they may not have—and hoping lease revenue will eventually bail them out. That’s a risky bet in a market still flirting with 14% vacancy and flat or negative net absorption.

The bottom line? Landlords are throwing more money at tenants than ever—but getting less for it.

The arms race for occupancy is burning through capital at a time when cash flow is critical. And in many cases, those tenant incentives are being offered by buildings already teetering on default.

Stubbornly High Interest Rates

And now, layered on top of all that: interest rates remain stubbornly high.

• The Fed’s benchmark rate is hovering near 5.25–5.5%, up from nearly 0% just two years ago.
• That spike has doubled (or tripled) borrowing costs for landlords who once counted on cheap debt to float TI packages and fund buildouts.
• In today’s rate environment, every dollar borrowed to support concessions is more expensive, and harder to justify—especially for assets already underwater or nearing refinance cliffs.

Labor Shortages Are Bidding Up Retrofit Prices

It’s not just materials. Skilled labor is in short supply, especially in major metro markets.

• The U.S. construction sector is short over 500,000 workers, according to the Associated Builders and Contractors.
• Trade contractors—especially for HVAC, electrical, and structural work—are inflating their bids by 15–25% to account for labor scarcity and material delays.

This doesn’t just hit developers—it’s gutting landlords forced to offer turnkey deals to lure new tenants in a soft market.

Where This Is Going—And What Tenants Should Watch For

The current state of the commercial real estate market—soaked in concessions, strained by construction costs, and throttled by high interest rates—is unsustainable. But it’s not permanent. Here’s what to watch in the second half of 2025 and beyond:

TI Packages Could Plateau—But Not Immediately

Tenant Improvement allowances can’t keep rising forever. As more landlords face refinancing cliffs and balance sheet strain, the cash simply won’t be there. Expect:

• A plateau or pullback in TI budgets by late 2025.
• More creative leasing strategies, including co-investment models where tenants contribute capex in exchange for rent reductions or ownership stakes in improvements.
• A possible return of turnkey leases, especially in second-gen space, where landlords build out spec suites to control costs upfront.

Interest Rates Might Drop—But Debt Stress Will Linger

The Fed is signaling possible rate cuts in late 2025 if inflation remains controlled. But even modest relief won’t immediately fix capital stack problems:

• Legacy debt from the 0% era is still coming due at much higher rates.
• New financing, even at 100–150 bps lower, is still far more expensive than what landlords had priced into earlier pro formas.
• Any rate relief will help new deals more than it saves distressed ones.
  

Expect More Short-Term Leases and Flexible Structures

Tenants are demanding flexibility in an uncertain economy—and landlords are increasingly forced to give it:

• Shorter lease terms (3–5 years) with options to renew or expand.
• Termination rights, often with partial payoffs, are becoming more common.
• Spec suites and plug-and-play buildouts are replacing custom improvements, especially for smaller footprints under 20,000 sq ft.

Tenant incentives won’t disappear, but they will evolve. As capital dries up and office footprints shrink, landlords will have to choose between:

• Offering lighter, more structured packages with clearer ROI.
• Downsizing or repositioning assets altogether.
• Or exiting the market through sale, redevelopment, or foreclosure.

For tenants, now is the moment to negotiate hard, lock in favorable terms, and demand financial safeguards—before the leverage starts to shift.

Takeaways for Tenants

The window of maximum negotiating power won’t stay open forever. Here’s what corporate occupiers should take from today’s turbulent environment:

• Strike while capital is still flowing. Concessions are rich now—TI dollars, free rent, flexible terms—but they come from landlords under pressure. That leverage won’t last as supply adjusts and capital markets shift.
• Scrutinize the promise behind the perks. A high TI allowance means little if the landlord can’t deliver. Insist on escrowed funds, progress payment schedules, or performance guarantees to safeguard your build-out.
• Prioritize flexibility. Termination rights, expansion options, and sublease clauses are more than nice-to-haves—they’re critical risk management tools in an uncertain market.
• Don’t ignore the fundamentals. A shiny concession package doesn’t make a weak building stronger. Assess location, building health, ownership stability, and lender involvement with the same rigor as the lease terms.
• Think beyond your lease. Rising retrofit costs and regulatory changes (like residential conversions) are reshaping inventory. If you plan to stay long term, evaluate the trajectory of the neighborhood—not just the square footage.

This isn’t just a tenant-friendly market—it’s a tenant-opportunity market. But only for those who negotiate like the stakes are real. Because they are.

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