FEATURE ARTICLE, SEPTEMBER 2005

RIDING THE TREND
Real estate companies are creating concept spec spaces for commercial properties.
Valarie King

King

Growing Trend: Concept Spec Space

One growing trend that our firm has witnessed in the past few years concerns the creation of concept spec office space within existing commercial properties. This new approach to leasing seems to work well for companies that are having difficulty leasing large contiguous areas of vacant space. There are risks and benefits to this method.

A landlord’s traditional timeline of negotiating with a prospect followed something along these lines: a prospect would view available space in the condition left by the previous occupant, the landlord would submit a proposal to the prospect, both parties would agree to an acceptance of the general terms of the proposal, the prospect would meet with a space planner or architect, a site design would be agreed upon, a construction allowance would be determined and, at that point, there would be a final negotiation of terms. This timeline generally describes how leasing has operated for decades.

Times have changed in Texas, and during the past few years many landlords have begun to embrace the philosophy of concept spec space. There is a growing belief among many industry professionals that building out concept spec space in commercial properties provides a better marketing tool to prospective tenants. This type of approach provides numerous benefits to tenants, landlords and the broker community.

From a tenant’s perspective, the greatest benefit of this expanding trend is that it allows the business owner to visualize his working environment. No imagination is required when viewing spaces that have been completed. These spaces are usually accessible and ready for immediate move in, as opposed to old world ideology, which would have featured the distinct possibility of construction and build-out delays. Concept spec spaces provide tenants with a much more efficient use of their time, through the elimination of countless planning and development hours. Business owners love the notion that companies can be open for business immediately after move in. Brokers also love this process because it helps them match their prospect with immediately available spaces and configurations. Faster placements lead to increased revenues for all concerned.

From a landlord’s perspective, this trend also offers many attractive benefits. Construction and build-out costs can be streamlined and reduced. For large, open and contiguous spaces, several smaller individual spaces can be designed and finished by utilizing the same construction team. This efficient use of resources leads to streamlined costs and volume savings with contractors. In the marketplace today we see smaller spaces leasing more quickly than larger ones, so occupancy levels in properties using this method tend to rise at a faster pace. There is also an element of greater control, which appeals to landlords. By building spec, the landlord controls the look of each space (colors, finishes, etc.), which ensures that the space should be leaseable if or when a tenant vacates.

Our typical layouts of concept spec spaces take this form: 1,000-square-foot spaces tend to include two executive offices, a reception area, a small coffee bar, and a separate workroom area. Spaces ranging from 1,500 to 2,000 square feet include three or four executive offices, a reception area, a small open room, a workroom, and a kitchenette. Spaces of 2,500 square feet include five to six executive offices, a reception area, a bullpen, a workroom, and a kitchenette. Most concept spaces will be freshly painted and have new carpet in the reception areas. We’ve found that these different layouts have received wide acceptance from prospects, and have enabled us to lease our spaces two to three times faster than when using a traditional leasing model.

Additionally, commercial landlords love the enhanced speed of revenue generation, which emanates from this process. With space finished and available, tenants can move in and become immediate cash-flow generators once they decide upon the design that appeals to them. Construction delays and philosophical differences become aggravations of the past. Lastly, there are some substantial tax benefits for landlords that follow this model. A full explanation is too lengthy to mention in this article, but the main tax benefits are derived from depreciating “make ready items” as opposed to construction costs being termed a “tenant improvement.” Consult your tax advisor to get a more detailed explanation of the differences between make-ready items and tenant improvements.

There also are risks to this approach. There is always the possibility that a prospective tenant will want you to undo some of the work already completed. Personal touch and special preferences are factors that must be considered, and some tenants may want your space, but not in its present form. A landlord could incur double expense if it encounters a finicky prospect. In addition, some prospects may be turned off by completed concept space, and you may not have anything else in inventory to show them. A landlord may be forced to turn away a prospect that is not interested in immediately available space.

We have evaluated the pros and cons of this new trend, and we believe that the concept spec space trend will grow in prominence and may become a leasing staple within the next few years. In an industry where everyone competes for any advantage, this concept provides benefits for all parties. While not a perfect fit for all types of commercial properties, concept spec space has earned a growing prominence in the leasing world and in the hearts of business owners and property owners alike.

Valarie King is director of property management for Hartman Management, a Texas-based commercial property management company.

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