CREJ - Office Properties Quarterly

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Page 22 — Office Properties Quarterly — April 2015
Design
G iven the choice, about half
of all office users would
prefer a “sexy” workspace.
Sexy is color and texture.
Sexy is new technology.
Sexy is in. Sexy interior design is
about branding and corporate cul-
ture fused together in a package
that brings the wow factor into
sharp relief. Sexy
is also pretty pric-
ey in a cycle where
construction costs
are out of control.
You know what’s
not sexy? Spec
suites. They’re
designed to be
rather pedestrian,
basic, utilitarian.
So why are they
gaining so much
notoriety in an
office market that
seems to want something different?
By definition a spec or speculative
suite is an office space built out by
the landlord without a prospective
tenant in the mix. That is, landlords
prepare office suites as a way to
shorten the entire search-to-lease
process that tenants traditionally
must navigate. The design and con-
struction is done on the front end
before a lease is negotiated. This
might mean that suites are move-in
ready, including fixed or demount-
able perimeter offices, furniture,
lighting, paint, carpet, window
treatments and more. Or they can
be in “white box” or “vanilla box”
condition with tenant improve-
ments limited to bare bones heat-
ing, ventilating and air condition-
ing, electrical, finished ceiling, rest-
rooms and a concrete slab floor.
The variations between these
two options can be virtually limit-
less, depending on the trends of a
particular market. But generally,
the more restrictive a given spec
suite appears, the less notice it will
attract from prospective tenants.
In any event, landlords must pay
for improvements to these suites
whether a tenant ultimately leases
the space or not, so there is some
risk. The safe bet, at least in the-
ory, is for landlords to stay on the
“generic” side of the design path,
if there is such a thing in today’s
office market.
By casting as broad a net as possi-
ble with a clean, basic design, land-
lords attract a wider range of ten-
ants and mitigate the risk of sitting
on spec suites either too stripped
down or too exotic to attract ten-
ants with a fairly traditional busi-
ness model.
What that means, essentially, is
that most prospective tenants need
to “visualize” themselves in a space
before they would commit to any
kind of custom design completed
through traditional channels. Spec
suite leasing can forego that step by
offering a staged option, not unlike
a home residence, except that
whatever is in that space stays in
the space after the lease is signed,
with little or no additional costs
incurred by the landlord or the ten-
ant.
Spec suites are usually smaller
in size – between 1,000 and 5,000
square feet – so that factor alone
eliminates large users with contigu-
ous space requirements. On the
other hand, some landlords will
dedicate larger vacant blocks of
space to a spec suite “program” by
improving many suites at once in a
single building or many buildings,
with the goal of finding tenants on
a rapid growth curve with flexible
requirements for space and lease
terms.
In this case, landlords control
the astronomical cost of construc-
tion through economies of scale by
building out multiple spaces simul-
taneously. These spaces are typical-
ly high quality and move-in ready
with a variety of finish options
and layouts. Similarly, tenants can
enjoy the option of expansion more
quickly than traditional methods
of design, construction and leasing
will allow. There are no rules here,
however, so landlords and their
leasing representatives are continu-
ously hustling to apply the right
strategies to the right markets at
the right time.
Typically, it is a distressed mar-
ket that stimulates more spec
suite activity. At the very least,
spec suites are almost always in a
landlord’s discussion when trying
to combat high vacancy. But that’s
not the case right now, at least not
along the Front Range.
The sector as a whole is in an
extremely low-vacancy cycle –
about 10 percent, according to
CoStar Group commercial real
estate services. In fact, metro Den-
ver’s office market is among the
healthiest in the nation with simi-
larly rosy projections on the hori-
zon. Fundamentals will remain par-
ticularly robust, and although new
product continues to come on line
in the central business district and
southeast suburban submarkets –
the metro area’s largest – much of
that space is already leased. Con-
sequently, there is no significant
“flight to quality,” a clear indication
that an ailing market is struggling
to correct itself. On the contrary,
this market is firing on all cylinders.
Sure, some Class B properties are
still lingering and landlords are
keen to apply the spec suite model
to a good percentage of that type of
vacancy when conditions are favor-
able. But on balance, rental rates in
premium Class A and AA properties
will continue to tick up over the
next several quarters while Class
B space continues to be absorbed.
Additionally, most landlords have
stopped offering heavy incentive
packages and major concessions,
such as extended free rent. They
don’t need to do that anymore to
remain competitive.
But no market is ever 100 percent
leased. There is always turnover,
and there are always spaces that
will not move for one reason or
another. In a low-vacancy market
like this one, maybe a large tenant
leaves “leftovers” of a few hundred
or a few thousand sf, oddly config-
ured or unfavorably located over
multiple floors or even multiple
buildings. Maybe the suite has a
less than stunning view or less than
desirable neighbors. It happens.
The point here is that landlords
are always leasing, and still have
to seek creative ways in which to
market those stubborn spaces that
won’t budge. Spec suites often can
meet those challenges and prove to
be the better choice when all other
factors between competing proper-
ties are relatively equal.
Those same spec suites often can
prove invaluable when looking at
office properties through a sales
prism.
It’s obvious that investors are
bullish on metro Denver across
all property types and almost all-
submarkets. Office buildings are
trading at near record rates, which
usually advance a good-news-bad-
news scenario for landlords. The
good news is that interest rates
are still low and both sales volume
and sales velocity are red hot. The
bad news is that everybody already
knows this. Competition to attract
buyers is no less fierce than it is to
attract tenants. It’s all about value
for both sides of the deal, even after
exhaustive analytics reveal the mar-
row of any given property.
Well-designed spec suites can,
and often do, swing a deal to the
landlord with the vision and fund-
ing to invest at precisely the right
time. Value is always going to tran-
scend design, regardless of how
well or poor an unimproved suite
might look. It’s finding that value
that can be a tricky business.
Like any leasing strategy, or micro
strategy as spec suites are known
in some markets, landlords must
strive to stay ahead of the curve
or at least on top of it. That can be
a tall order when obsolescence in
interior design and technology out-
pace the traditional planning and
construction timeline. It’s one thing
for landlords to build out a space
with a custom open plan to satisfy
a single tenant with a sharp eye on
keeping its millennial workforce
productive and happy. It’s another
thing altogether to build out a full
floor of spec suites with similar
requirements that appeal to a rela-
tively small percentage of users.
But it’s happening now, and coming
soon to a submarket near you.
The rather literal new moniker
for these units is “tech-suite,” or
“tech-spec,” but the basic leasing
strategy is the same. The design is
not. It’s sort of an open-plan-gone-
wild proliferation, especially in
the major U.S. tech hubs that are
seeing good to very good results.
Designs can range from plug-and-
play industrial-style open ceilings
and concrete floors to more refined
models with paint and flooring in
shockingly vivid colors and textures
embraced so passionately by the
Google crowd. That’s because it is a
Google-like crowd that will inhabit
these spaces.
Granted, landlords are not going
to shell out top dollar for the addi-
tional tenant improvements typical-
ly demanded by this group. But they
may offer more than what a generic
spec package would, if the numbers
make sense. The jury is still out on
that one for metro Denver. But not
for too long.
The war between the open office
and its many detractors is still rag-
ing, though widely misunderstood
in most major markets. But that’s
not a landlord problem. Spec suites
of any size, shape or level of finish
are designed to offer the landlord
some measure of inventory cost
control in a largely uncontrolled
market.
Spec suites almost always
increase the overall value of an
office property. And with good tim-
ing and solid design and construc-
tion, the return on investment is
usually worth the risk for land-
lords and tenants. In that respect,
spec suites are doing the job they
were created to do decades ago.
That’s not sexy. But it certainly is
sensible.s
Tia Jenkins
President and
architect, Kieding,
Denver
Most prospective tenants need to visualize themselves in a space before they would
commit to any kind of custom design completed through traditional channels.
The safe bet, at least in theory, is for landlords to stay on the generic side of the design
path, if there is such a thing in today’s office market.