Investing in an office fitout preemptively appears to be a high-risk strategy for developers in the hard-hit office sector.
However, speculative suites have experienced elevated market activity, especially in Melbourne and Sydney CBD markets, says Cushman & Wakefield’s national director and head of metropolitan leasing and office leasing, Ben McKendry.
“Speculative suites have long been used by owners to create a point of difference in competitive markets as owners seek to create a compelling relocation option that saves tenants time and money,” he says.
“Developers typically see stronger face rents, reduced down time and [you open] your space up to a wider tenant pool, so the benefits are win-win for all parties.”
The idea of fitting out an office before it has been leased could lead some developers to baulk, but there could be advantages to delivering speculative suites.
“Spec suites offer a better solution to taking sublease space, which is often dated and requires significant modification” McKendry says.
“Tenants love the concept and financially they pay a slightly higher rent but save time and money.”
Cushman & Wakefield’s associate director of office leasing NSW, Tim Stanway, says that the market remains strong in Sydney, especially in buildings with large vacancy or in challenging spaces on a floor plate that either is irregular in shape or has a restricted outlook.
“Traditionally, the market for building speculative fitouts were for sub 500sq m suites, however we are now seeing landlords build speculative fitouts for larger whole-floor offerings of 1200sq m plus.
“With a surplus amount of competing options in the market, tenants are looking for premises that offer a point of difference and offer a turnkey solution to ease the relocation process,” he says.
It has been a trickle rather than a flood of speculative suites up until recently, and Dexus’s NSW general manager for leasing and projects, Joshua Pails, says that the developer has included speculative space at multiple projects, including 44 Market Street, 1 Farrer Place and 60 Castlereagh Street in Sydney, as well as 1 Eagle Street in Brisbane.
“We roll out speculative fitouts across the portfolio, it’s an important part of the product mix in all our assets.
“Dexus was a pioneer in this space and in its simplest form around 10 years ago when we first speculatively fitted out these suites we were more focused on more difficult places to lease.
“But that has evolved over time because it has been so successful and we’ve now built them proactively in asset plans.
“We’re building them in B-grade to Premium towers and from 150sq m small suites to, in the last couple of years, a full floor of 1000 square metres.”
Pails says that rather than a prospective tenant having to complete their own fitout, there are benefits to a speculative office.
“[Customers] get access to the latest in terms of design, because we’re leveraging our partners externally and internally, so they are modern, attractive and help these businesses and people back to the offices and retain talent.”
One of these partners is CREO Design Group, which has worked on two floors of 240 Queen Street in Brisbane, and Level 45 of Melbourne Tower.
Managing principal of CREO Simone Linossi-Grove says that the business opened in 2017 and it has been involved in speculative projects since.
“It’s got to the point where we’re almost not speculating anymore.
“We’ll do our market research, we’ll see what’s available in the area, we’ll have a look at the building, what amenities they offer, what’s close by and we’ll design to that space, to make it more leasable and easier for businesses to move in and hit the ground running.”
Given that the Property Council’s latest Office Market Report suggests that the flight to quality in Australia’s office market and the desire for CBD office space continues, speculative suites are diversifying the market and bringing high-quality offices with a focus on flexibility and creating a sense of community, Linossi-Grove says.
“People just don’t have the time or energy to think—everyone wants everything on demand, so you’ve got a space, it works, there’s a bit of brand implementation, one or two tweaks and you’re ready to jump into a new space.
“It’s also very much about that social element, bringing people back to the office and as a result, people are spending a little bit more money on these speculative suites than they used to.
“The WeWork and rental market is great for smaller businesses starting out in temporary space, but there’s that next level where you’ve grown and you need more space, you need boardrooms, you need your own identity.”
Two or three years ago budgets were a big challenge in designing them to look good and offer that quality of design, she says.
“But now because the market is changing and there is so much space available, people are investing a little bit more, the spaces are becoming larger, those breakouts and that social component are becoming ever more important.
“We’ll also design in such a way that we’re not putting [for example] kitchens on what could be a tenant’s separating wall, so they’ve got that flexibility to open up that space without too much demolition or reworking of the space.
“We’re looking at spaces that can be movable or interchangeable.”
While Sydney, Melbourne and increasingly Brisbane are attracting more and more speculative developments, the speculative office market has also grown in Perth.
Cushman & Wakefield director and head of Leasing in WA, Roly Egerton-Warburton, says that the market had softened due a major correction in the oil and gas, and iron ore markets, following a 10-year boom.
But what has changed recently, is demand has outstripped supply, as many landlords stopped delivering spec fitouts with the rise of construction costs, due to the pandemic, he says.
“The main economic driver is the decreased letting up period for the space … they reduce the lessee’s responsibility to project-manage the fitout, saving time and internal resources.
“Spec suites have been around for a long time and will continue to be part of the market for the foreseeable future but will be subject to market vacancy and demand at the time.
“Owners who are repositioning assets after larger occupiers have left will continue to spec fitouts to create a point of difference and diversity of offering resulting in quick let-up times and a diverse relatively risk-free expiry profile,” he says.
Speculative suites add to the diversity of office offering and will continue to adapt with the market, Dexus’s Josh Pails says.
“Big businesses are struggling with what workspaces look like in the future. We are constantly listening to what the market is saying across all size ranges as to how they will use their space and using expert consultants that we have to help us evolve what they look like over time.
“We’re seeing a strong flight-to-quality trend, for the reasons of talent attraction and retention and to have amazing spaces for staff and clients—that won’t go anywhere.
“Without doubt they are here to stay and will continue to evolve, as businesses evolve their thinking around the workplace.”
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