Should You Consider Spec Suites to Fill Your Vacancies?

Photo Courtesy of The Kelemen Company

Let’s face it. Not all office space is easy to lease. As an Orange County office property owner, you know what we mean. For one reason or another, every building has a space or two that pose a marketing challenge. The space could be too small, too big, have too many private offices that are too small or too few offices that are too big. It could be too shallow or too deep, too noisy or too dark. Maybe it just looks tired and prospective tenants can’t see past the worn-out carpet and scuffed up walls.

Whatever that reason is, something needs to be done because that empty space is costing you money every day. Typical solutions include lowering the price, offering free rent or tempting the brokerage community with a nice bonus to the agent who brings you the deal. Sometimes these things work and sometimes they don’t.

In today’s post, we look into another solution that has gained a lot of traction in the past few years: the spec suite. The concept is pretty simple: build out your empty space before you find tenants as a means of securing them sooner. Sound counter-intuitive? Perhaps. However, landlords throughout the ownership spectrum have turned to the concept of the spec suite to improve leasing performance, especially with their smaller vacancies. Let’s take a look at the pros and cons of this interesting lease-up strategy. Let’s consider the potential benefits first:

Remove a Problem

If you have a space that is old or tired or laid out poorly, starting over with a spec suite solves a big problem. Most tenants have a hard time visualizing the potential of a space if they are distracted by what they see, even if they are told that the money is there to retrofit the space. A spec suite done right removes visual clutter and reflects up-to-date colors, layout, and design, making it easier for prospective occupiers to picture how their business would function efficiently in that configuration. It will also make your spaces more competitive with those offered in other properties.

Save Time

There’s a universal axiom of truth in the real estate business: time always works against you. This is especially true when it’s applied to smaller companies looking for space under 3,000 square feet. They tend not to plan far enough ahead for a move, get in the game late and end up in a mad scramble to find “something that works”. The spec suite offers a solution to those who don’t have the time to sign a lease and wait three to six months for the build-out to be complete.

Simplify the Process

Negotiating all the business points and legal details are complicated enough, let alone adding a complex work letter and space plan to the equation. If you are negotiating on a well-designed spec suite, you are that much closer to “yes” as negotiations begin. Most small tenants are unaccustomed to negotiating real estate leases and find the whole process confusing, frustrating and risky. By offering them a simpler path to completing the process, they have less to worry about and can focus more of their energy on making their upcoming move simpler and less stressful.

Divide & Conquer

Optimum suite size depends on your property’s location, age, design, building class, and prevailing market conditions. If you have vacant space in a size range that does not fit with the current pool of potential tenants, the spec suite concept may be a good option. Let’s say that you have a 5,000 square foot space available, but it has been sitting empty for months because your property generally attracts smaller tenants. You may want to consider breaking the space up into small increments to realign with market demand and build out some or all of the new suites on a spec basis.

Send a Good Message

By building out spec suites rather than showing old and tired space, you send a message to prospective tenants that you are a serious investor who takes pride in your ownership. By demonstrating your willingness to invest your capital, you are more likely to attract higher quality tenants who believe you are the type of owner who will be concerned with their workplace experience, which has become extremely important to business owners who must attract and retain good workers to be successful in a competitive economy.

Now, let’s take a look at some of the risks associated with spec suites:

If You Build It, Will They Really Come?

This play on the famous line in the movie classic Field of Dreams raises an important issue. While spec suites can attract quality tenants in a shorter time, there is no guarantee that your up-front investment will pay off. You could build the space out and still have it sit empty. That means something else might be wrong. It could be that your building has other more important issues to address like functional obsolescence, items of deferred maintenance or a lack of the on-site amenities that so many tenants are looking for these days. So, before you invest in spec suites, you must take a hard look at the bigger picture.

It Can Get Expensive

Building out spec suites is not cheap, and you’ll have to fund the improvements without the benefit of the cash flow from the lease since you don’t have a tenant yet. You may also have to spend more once you find a tenant in the event they insist on additional improvement before making a commitment. So, it is important to work with your real estate professionals to design in as much of what prospective tenants are looking for in terms of the essentials and come up with a layout that will allow for additional offices and conference rooms.

Markets Change

That only true constant in the real estate industry is that it’s always changing. Building out spec suites without a thorough understanding of market dynamics can be a costly mistake. While an attractive spec space will make your building more competitive, a big shift in market demand could trump your new investment. A long term perspective rooted in a realistic understanding of where your market is going is imperative. Without that, moving forward with any new marketing strategy may not be worth the risk, and it may be that your capital is best allocated in another asset.