Constructing speculative suites, or spec suites, has been a common practice by office landlords for the past two years in the Minneapolis- St. Paul metro. It is equally popular in urban and suburban markets and in both Class A and B buildings. The popularity of this trend stems from the goal to simplify the search and tenant move-in process and shorten timelines to lease up space.
Spec suites are also highly advantageous in buildings where the existing vacancy inventory is tired and doesn't show well. The decision makers who will be leasing spaces often need the visual guidance that a well-constructed spec suite will deliver to help them make the decision. Showing a spec suite versus a second or third generation, tired office tends to streamline the leasing process and improve the chances a tenant will take the next step on a particular space or building.
Therefore, landlords are building turnkey suites that create:
Cost saving efficiencies.
An easy, immediate and trendy space that many tenants find attractive.
First, from a build-out cost standpoint, there are cost savings for a landlord. For example, if there is a multi-tenant floor that would require multiple tenants to build-out space, they will individually negotiate for TI allowances and free rent to cover that cost. This can become cost prohibitive for a landlord with a TI exceeding +/- $60 per-square-foot.
However, if the landlord creates multiple, finished spaces on their own—making material and layout decisions and economies of scale— the landlord can help reduce costs below current TI allowance trends (+/- $30 per-square foot). Creating turn-key spec suites also makes the process of updating those spaces for future occupancy much easier.
Other cost saving options exist as well, like partnering with design firms and furniture companies to negotiate competitive pricing because of the amount of product purchased, thus lowering the cost per unit. These companies are often willing to negotiate because of a desire to showcase their product to potential clients as well. This strategy allows for these spaces to have the look and feel of a high-end, modern office without tenants and landlords having to tackle a potential year-long, design-build process.
Second, tenant requirements are also changing. Flexibility is king for start-ups and growing companies and the largest disrupter in commercial real estate, coworking, was created to fill this need. Understanding the competitive environment that coworking has created in the market, we see more landlords becoming amenable to shorter or more flexible lease terms to offset the real challenges of growth and uncertainty for new and existing tenants. Also, anticipating that expansion or contraction space needs arise, having spec space ready can help landlords retain existing tenants.
The sweet spot for spec suite sizes is 3,000 square feet and under. Tenants larger than 3,000 square feet start to have noticeably different build-out requirements or needs. A smaller footprint lends itself to more general layout requirements, which are easier to create as a one-size-fits-most office space for smaller tenants. Sometimes the best options are for buildings that have multiple spec suites of several different sizes from 750-3,000 square feet, which offers the most possible options for fluid and immediate demand.
The need for modern, hip looking space to attract and retain talent, while also keeping quick decision-making and flexibility as top priorities for companies, makes spec suites an excellent option for many tenants. While each submarket is slightly different, it is likely that tenant trends will continue to demand this type of space and if landlords want to stay competitive in the market, they will need to find these spec space sweet spots within their properties.
Colliers International | Minneapolis - St. Paul
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