Facing Big Vacancies, D.C. Office Landlords Turn To Larger Spec Suites
With D.C.'s downtown office vacancy rising and tenant preferences changing, landlords have undertaken a new strategy to fill space.
Owners are increasingly building out speculative suites, office space that is built ready for a tenant to move in before one signs, with larger floor plates than ever before.
"I'm getting floor plans sent to me, 'do you think this will appeal to your tenants?'" O'Brien said. "Especially recently, it has really picked up, just within the past month."
Spec suites used to be no more than 5K SF, typically used for small, vacant sections of an otherwise occupied floor, but O'Brien said landlords are beginning to build out spec suites between 10K SF and 20K SF. These spaces allow tenants to move in right away and typically offer shorter lease terms, with some allowing tenants to commit to fewer than five years.
Many of these larger spec suites have begun construction so recently that it has not been proven whether or not they can be successful, but O'Brien has a feeling the concept will work.
"I think it is viable because a lot of the companies that I work with don't love signing long-term leases, especially if they're growing," O'Brien said. "Being able to go into a building with a space that's already built, they can do some design tweaks to make it their own. I think that's going to prove to be very appealing to those types of tenants."
JLL Senior Research Analyst Carl Caputo said the trend toward building spec suites has emerged, in part, because of increased vacancy and a lack of larger tenants on the market. D.C.'s office vacancy as of Q3 sat at 12.4%, according to JLL's market report. Vacancy has been highest in Downtown D.C., where a surge of new supply is delivering.
"If you have a building that just delivered fully vacant with no commitments, and you look at the demand pipeline, you realize you can’t get a large 50K SF tenant in the building until at least 2020 because the demand pipeline is so eaten up," Caputo said. "So you think about 'what do we do with space that’s probably going to be vacant for [the] next three years?' One of the strategies is to go and build it out and show tenants how cool it can be."
Boston Properties is planning a $60M renovation of Metropolitan Square, the 670K SF building at 655 15th St. NW. As part of the renovation, it is creating a host of spec suites, designed by Gensler, with some larger than 19K SF.
The spec suites are slated to deliver early next year and have already seen strong activity from a wide range of tenants from tech companies to government affairs offices to associations and even law firms, said Newmark Knight Frank's Morgan Monroe, a member of the landlord's leasing team.
"The spaces just can't be built quickly enough," Monroe said. "Even for the tenants of 10K to 15K to 20K SF, many are looking for space that they can see with their own two eyes, where they don't have to look at a construction timeline. They want space ready to go so they can move in over the weekend."
Metropolitan Square is also home to D.C.'s largest WeWork, a 120K SF space that opened late last year. Monroe said multiple WeWork members have already toured spec suites in the building, which the landlord sees as a key demand driver. As companies begin to grow out of their WeWork space, they want larger offices of their own, but still want space that is built out and ready to move in, making spec suites the perfect option.
At Market Square, a high-profile building along Pennsylvania Avenue, Columbia Property Trust has recently launched a spec suite program. The suites range from 1,500 SF to 8,500 SF and are designed to evoke characteristics of specific D.C. neighborhoods, such as Georgetown, Capitol Hill, Woodley Park and East End.
Columbia Property Trust's Mark Witschorik said the landlord has signed multiple leases for spec suites ranging from 1,500 SF to 5K SF, and has letters of intent for some of the larger spaces. He could not disclose the names of the tenants.
"We've been encouraged that some of the most immediate demand is in the 5K to 10K SF range," Witschorik said. "There has been a response from the market that the immediate availability and quality is in demand."
Given this shift in tenant demand, Witschorik said Columbia plans to employ similar strategies at its other D.C. properties. It also owns 80 M St. SE in Capitol Riverfront — another building that counts WeWork as a tenant — and recently acquired 1800 M St. NW.
While this trend of larger spec suites is still in its infancy, Caputo said the early signs show it can be successful.
"We've seen a number of buildings have good success with building spec suites," Caputo said. "People are talking about it more, and I think number of spec suites you hear on the market that are being built has grown significantly."