If you are signing a commercial lease in Phoenix, Scottsdale, Chandler, or anywhere in the Valley, you are going to face the tenant improvement question: how much will it actually cost to build this space out? And the answer your broker gives you and the answer your contractor gives you are often very different numbers. This guide gives you the real figures — broken down by use type, finish level, and what actually drives cost in Arizona's commercial construction market in 2025.
What Is a Tenant Improvement (TI)?
A tenant improvement — also called a TI or leasehold improvement — is any construction work done to customize a commercial space for a specific tenant's use. This includes everything from basic paint and carpet to full gut renovations, new plumbing and electrical, custom millwork, and HVAC modifications. The scope varies dramatically based on whether you are taking a vanilla shell space, a second-generation space with existing improvements, or a raw industrial bay.
The Short Answer: TI Costs in Phoenix 2025
Commercial tenant improvement costs in the Phoenix metro currently range from $35 to $350+ per square foot depending on use type and finish level. Here is how the major categories break down:
| Space Type | Basic | Mid-Range | High-End |
|---|---|---|---|
| Office (open plan) | $35–$55/sqft | $55–$100/sqft | $100–$180/sqft |
| Office (private offices) | $65–$90/sqft | $90–$140/sqft | $140–$220/sqft |
| Retail (soft goods) | $40–$65/sqft | $65–$110/sqft | $110–$175/sqft |
| Retail (food/bev) | $95–$140/sqft | $140–$220/sqft | $220–$350/sqft |
| Restaurant (full kitchen) | $175–$220/sqft | $220–$280/sqft | $280–$400+/sqft |
| Medical / Dental | $110–$150/sqft | $150–$200/sqft | $200–$280/sqft |
| Salon / Med Spa | $80–$120/sqft | $120–$180/sqft | $180–$260/sqft |
| Warehouse (office portion) | $30–$50/sqft | $50–$85/sqft | $85–$130/sqft |
What the Landlord's TI Allowance Actually Covers
Most commercial leases in Phoenix come with a tenant improvement allowance — a per-square-foot dollar amount the landlord contributes toward your buildout. In the current Phoenix market, TI allowances typically run:
- Class A office space: $50–$80/sqft
- Class B office space: $25–$50/sqft
- Retail (inline strip): $20–$40/sqft
- Industrial/flex: $10–$25/sqft
The gap between the TI allowance and the actual buildout cost is your out-of-pocket construction expense. On a 3,000 sqft mid-range office buildout at $95/sqft ($285,000 total) with a $50/sqft landlord allowance ($150,000), your out-of-pocket is $135,000. That number needs to be in your financial model before you sign the lease — not after.
"We review every client's lease work letter before finalizing their buildout budget. The gap between the allowance and the actual cost is one of the most common financial surprises in commercial real estate — and it is entirely preventable."
The Biggest Cost Drivers on Commercial TIs in Arizona
1. HVAC — The Arizona Premium
Phoenix's extreme heat means HVAC is never a minor line item on a commercial project. Depending on your use type and the existing HVAC infrastructure in the shell space, HVAC work can run from $8/sqft (simple duct modifications in an existing system) to $35+/sqft (full new rooftop units, ductwork, and controls for a restaurant or medical facility). Always get the existing HVAC system evaluated by a licensed mechanical contractor before you finalize your budget.
2. Plumbing — The Slab Problem
Adding new plumbing fixtures — sinks, restrooms, floor drains, a commercial kitchen — requires cutting the concrete slab in most Phoenix commercial buildings. Slab cutting and plumbing rough-in is expensive and disruptive. If your build requires significant new plumbing in a location different from the existing rough-in, budget an additional $15,000–$45,000 depending on scope. This is one of the most underestimated costs on restaurant and medical buildouts.
3. Electrical Panel Capacity
Older Phoenix commercial buildings — particularly strip retail and Class B office — often have electrical panels sized for a prior tenant's use. A restaurant, medical office, or tech-heavy office may require a panel upgrade or a new sub-panel, adding $8,000–$25,000 to the electrical scope. Your electrician should evaluate the existing panel in the pre-construction phase, not during construction.
4. ADA Compliance
Any commercial buildout in Arizona must comply with ADA requirements for accessible routes, restrooms, parking, and signage. In an existing building, ADA compliance work can be straightforward or complex depending on the existing conditions. Budget $5,000–$20,000 for ADA-related work on a typical 2,000–5,000 sqft buildout, more if the restrooms need to be reconfigured.
5. Permit Timeline
Commercial permits in Phoenix and Scottsdale currently take 4–10 weeks for plan review depending on the project complexity and jurisdiction. This timeline directly affects your lease commencement — if you start paying rent before your permit is approved, you are burning cash. An experienced commercial contractor knows how to structure the permit submission to minimize review time and how to use the permitted early-start provisions some jurisdictions offer.
Second-Generation vs. Vanilla Shell: What's the Difference?
A vanilla shell is a space delivered by the landlord with basic HVAC, electrical, and plumbing stubbed in — but no finishes. You build everything from the studs in. A second-generation space is one that was previously occupied and has existing improvements. Second-gen spaces are often cheaper to build out IF the prior tenant's layout is compatible with your use. If it is not, you can end up paying to demolish the prior improvements AND build new — effectively paying twice.
Before assuming a second-gen space is cheaper, have an experienced contractor walk it and assess what stays and what goes. We do this at no charge as part of our pre-construction process.
How to Evaluate a Commercial Contractor's Bid
- Request a line-item scope, not a lump sum
- Confirm all allowances for finishes are explicitly listed
- Ask whether the bid is fixed-price or a guaranteed maximum price (GMP)
- Verify AZ ROC commercial license at roc.az.gov — not all residential GCs are licensed for commercial work
- Ask for references from projects of similar use type and size in the last 18 months
- Confirm their permit submission process and expected review timeline
Bottom Line
For most Phoenix-area commercial tenants, a realistic all-in TI budget — accounting for contractor costs, architect fees, permit fees, furniture, and technology — is 20–35% higher than the contractor's construction cost alone. A $200,000 buildout contract typically becomes a $240,000–$270,000 total project investment by the time you are open for business.
The best time to get an accurate construction cost estimate is before you sign the lease — so the number is in your model, not a surprise. We provide pre-lease construction estimates at no charge.