Landlords are in love with spec suites. So are tenants. And why wouldn’t they be? Spec suite love has never been more enduring than it is right now in metro Denver’s turbo-charged office market. In fact, spec suites, once known as a stop-gap for landlords seeking to dispose of small, oddly-shaped and otherwise unleasable spaces, now have become a requirement for building owners just to stay competitive in a leasing environment as robust as this one.
A TIGHTENING MARKET
The “spec” in spec suite means “speculative.” Think of the deployment of these fully-finished suites as a preemptive strike on the rapidly-shrinking inventory of metro Denver office space. That is, landlords risk transforming chunks of vacant space–usually between 1,000 and 5,000 square feet–into spec suites, hoping that the market will absorb them faster than “traditional” methods of leasing. In reality there’s almost no risk at all, for now anyway. Just ask any leasing broker. Spec suites here rarely stay on the market for long, and prospective tenants are constantly clamoring for more. Indeed, according to multiple second quarter market reports, the vacancy rate for metro-wide office space hovers at about 16%. That number should dip significantly as new buildings begin to lease up and more companies large and small choose metro Denver as home base. Other indicators note that positive net absorption remains consistently high while direct asking rates across the metro area are approaching or have already exceeded record levels. While these strong fundamentals bode well for the overall health of the market, tenants will feel the heat as availability tightens. This is especially true for small to medium-size tenants, growing rapidly and pressed to find quality space very quickly.
“I’d say there’s more spec suite development and leasing now than ever before,” says Nate Bradley, Senior Director with Denver’s Cushman & Wakefield. “The factors in the marketplace are forcing owners to have a spec inventory.” The confluence of those factors can force the hand of prospective tenants that simply fall out of the traditional build to suit process.
THE CONSTRUCTION TAB
Construction costs continue to rise and that will never change. Although prospective tenants already know this, it does not solve the problem of being priced out of the market before the search for adequate space can even begin. The design and construction of a single suite—especially in the 1,000 to 5,000 square foot range—is far costlier than a spec suite of the same size. Landlords can achieve economies of scale by building out a cluster of spec suites simultaneously, which enables general contractors to allocate labor more efficiently while maximizing materials savings.
“A 2,000 or 3,000 square foot deal on an island, build to suit costs far more than the build-out of three to five spec spaces,” explains Bradley. “It’s just common sense. It costs more money for the general contractor to mobilize, and more money for the materials. Everything goes up, including the cost per square foot.” (The aptly named “island” is industry jargon for a single, stand-alone suite).
COMPETITION AND RETENTION
Costs can also heavily influence design. For landlords, there is a sort of “competition within a competition” when marketing spec suites. That is, a property with well-designed and well-built spec suites is likely to attract more attention from potential suitors than a property with none. That’s a given in this market. So, what’s in the spec suite? What differentiates one from another? Usually, it’s the design, including style, and upgraded materials like lighting and finishes.
“Historically, spec suites were built with reception, conference room, break room, perimeter offices and open interior space,” Bradley points out. “The change today is in the perimeter with fewer fixed offices and more glass lines” visible from open area workstations. And office cultures continue to evolve with “agile” and other hybrid designs supplanting the all-open plan. Consequently, spec suite designs that feature more open and fewer fixed spaces cost less to build out. With significant cost savings on the design and construction side, landlords can sweeten the pot with any number of upgrade packages.
Tenants in the market are far more savvy than ever before, and they know what can differentiate one spec suite from another. Upgrades can include specialty lighting in reception and conference areas, LED lighting throughout the space, feature walls with wood, stone, or plant life, quartz countertops in fan-favorite breakrooms, and even a partially open plenum in certain pockets of any given market. Speaking of break rooms, employee recruitment and retention can hinge on how well those spaces are upgraded and marketed by the landlord and leasing team.
“Break rooms are focal points today,” Bradley says. “There’s no stigma associated with kitchens anymore. There’s no need to hide it. Those spaces are open and inviting with various types of seating to encourage socialization.” As a recruitment tool, tenants can win big by selecting spec suites loaded up with upgrades, while owners can win by ultimately retaining those tenants.
On the other hand,most spec suites must appeal to the broadest range of potential tenants, so landlords must determine what common features among a spec suite inventory will consistently attract the most attention. Only a very small percentage of spec suites—or “tech” suites–in metro Denver appeal to tech start-ups and their ilk, dead-set on the open-plan, open plenum experience. The vast majority of potential tenants seek relatively modest spec spaces with upgrades appropriate to their particular culture and operating methodology.
For smaller tenants, navigating the traditional leasing market is a cautionary tale, even with competent representation. Barriers can be difficult to overcome. Municipal building departments are backed up. It just takes too long and costs too much to find the right space, let alone the waiting and watching as it gets designed and built out. While this is an oversimplification, the core argument favoring the spec suite is sound. And these types of spaces continue to flourish even as building owners stretch their spec programs across full-floor and multi-floor vacancies.
“Spec suites here have been very effective, very well-received,” Bradley explains. “It’s a timing thing and a cost thing. With a good spec inventory, landlords can control costs and have product available when tenants need it. It’s all about demand, and demand is very, very strong.”
Katie Winter is a Design Director at KIEDING. Reach her at kwinter@kieding.com