Downtown Boston office towers that have recently completed spec suites include the 1.4 million-square-foot One Post Office Square (pictured) and One Financial Center. Image courtesy of Gensler
Much has been made of Boston’s office sector woes: increasing vacancies, dropping valuations and overall concerns about the macroeconomic climate the city and the world are contending with.
Despite the negativity, our fair city has been percolating prospective new tenants, with overall office requirements pushing past 3.5 million square feet. Many of them are on the hunt for a flexible, seamless solution in the market: spec suites.
Speculative suites are spaces within buildings that are fully developed and built out by the ownership prior to securing any tenant commitment. They can be up to 20,000 square feet in size, but the majority land somewhere between 1,500 and 8,000 square feet. They are targeted at smaller organizations taking specific sections of a floorplate. This stands in contrast to a typical office suite, delivered as an empty shell, ready for tenant improvements and custom buildouts.
These prebuilt spaces have exploded in popularity as of late, with landlords making great strides to implement them and cater to the active tenant base. This is not an unfounded idea – ownership is responding to the demand from smaller office users who are looking for shorter-term leases, in smaller spaces, and with as little downtime as possible – ultimately all done to minimize their potential risk.
Risk comes in many factors: Long-term commitments and excess space are all concerns as firms attempt to navigate uncertain business conditions and remote work. These niche suites are ideal for the smaller tenant, especially given they often lack the resources of a large company, and therefore do not have fully staffed real estate departments equipped to handle the full build out of shell space.
They offer the occupier-friendly alternative – as close to “plug and play” as possible, with the benefit of having direct control over your workspace, in contrast to a coworking option. A cursory review of tenant requirements reveals that approximately 40 percent of those seeking office space downtown less than 7,000 square feet are targeting spec suites within their surveys.
Risks and Rewards for Landlords
This is an excellent microcosm of the “flight to quality” narrative that has been observed in the latest office market dynamics.
We know that larger tenants are fleeing to highly amenitized, class A and trophy buildings. Smaller tenants are going through a similar experience, moving towards these custom-built spec suites, which by their very nature are generally brand-new, purpose-built space – offering a comparable experience that the large requirements are seeking.
Landlords can charge modestly higher rents given work already completed, even further cementing the similarities for larger occupiers, where the tenants are shifting to the trophy buildings, even if it comes at a higher price.
From a landlord perspective, spec suites do carry higher risk. Ownership is going out of pocket to build space without any tenant in tow, something that would not be considered advisable in a market where most buildings have a healthy occupancy rate. They also risk “guessing” what the ideal layout for a tenant is, and deploying capital into a design that is not appealing to prospective users.
Mark Fallon
Furthermore, just the creation of these spaces does not guarantee tenancy – there are many that have sat on the market for months. Yet we have quantifiable data, from both smaller B class buildings, and 1 million-plus-square-foot towers that they are seizing on this trend.
On the larger side, 1 Post Office Square just completed three separate spec suites this spring on their 23rd floor, ranging from 5,000 to 8,000 square feet. One Financial Center – a 1.4 million-square-foot tower – is offering five different suites within that same size range. Over in North Station, 101 Merrimac St., a 157,000-square-foot office building, just recently completed a 6,000-square-foot spec suite. These types of suites are being received positively in the marketplace and generating significant interest.
The trend is clear. Occupiers are desirous of these simple workspace solutions, and landlords are rising to meet this demand. It is not expected that the spec suite will be able to turn the tide of office leasing on its own, but rather offers landlords – both institutional and smaller players – the opportunity to increase their buildings occupancy and drive activity to their vacant space.
Mark Fallon is director of research and strategy at brokerage Hunneman in Boston.
