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Why Have Spec Fit-outs Become So Popular For Tenants?

Before we answer that question, it is important to define exactly what ‘speculative’ fit-outs are.

A speculative fit-out, or ‘spec fit-out’ as they are known within the office leasing space, are new fit-outs constructed by landlords without any pre-commitment to the space by a prospective tenant.

Why would a landlord build a fit-out without any commitment from a tenant? 

Fitout works done ‘on spec are by no means a new concept. Landlords have always looked to re-use existing fit outs within their buildings by making changes to the presentation and design in order to re-present fitted out space back to the market in a better light. It makes commercial sense to do that. What we haven’t seen landlords do in the past, that we are seeing nowis build full fitouts (from scratch) with no prior commitment to the space from a tenant. 

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Since late 2012, the office market in Brisbane has been suffering from very high levels of vacancy. The competition between building owners to secure new tenants has been fierce, and therefore landlords have been looking at different ways to present their space in order to give their properties an edge. By having newly fitted out office suites available on display, prospective tenants are able to ‘touch and feel’ what they are getting, which often gives them far more confidence to make a decision. 

 The speculative suite market has now taken on a life of its own, and there have been hundreds of suites built across the Brisbane CBD and inner fringe areas over the past five (5) years with plenty more coming. 

Tenant benefits in leasing a spec fit out space

  1. The risk around the cost and delivery of the fit-out lies entirely with the landlord. The tenant has no liability whatsoever, which is attractive to many businesses.
  2. There is no time expended by the tenant in having to work with designers to plan the layout and pick the finishes. For many business owners and/or senior managers this is one of the key benefits.
  3. Quite often there is far more flexibility for the tenant around the term of the lease that they can take. Many businesses, particularly those that are still in their relative infancy, prefer lease terms of three (3) years as a maximum. For non-fitted space, it is not financially viable (in the main) for a tenant to deliver a fit-out themselves on anything less than a four (4) or five (5) year lease.
  4. Spec fit-outs allow prospective tenants to move very quickly and easily, which can be a major benefit for a business, particularly if they are experiencing rapid growth, or are managing change within their business.
  5. Tenancies with a spec fit-out can often be far more financially attractive to an incoming tenant. Many landlords will offer additional incentives as rental abatement over and above the new fit-out, even on lease terms as low as three (3) years. This is not achievable on non-fitted space.
  6. Landlords and agents have now become very adept in partnering with designers to create amazing new office space environments. Most building owners have now rolled out multiple new fit-outs within their properties and understand what finishes are most attractive to tenants. The competitive nature of the market place has driven a strong focus on quality, and owners would rather err on the side caution by investing more heavily in their suites to ensure they have the very best chance of leasing.
  7. Tenants that have leased a space with a spec fit-out are not required to carry out a full ‘make good’ (strip out) at the end of the lease term. Requirements of a ‘make good’ are that the tenant returns the space to the landlord as they found it. This isn’t required with spec fit-outs as the landlord paid for and owns the suite, so no strip out is needed. 


Tenant negatives in leasing a spec fit out space
 

  1. Given the landlord is constructing the fit-out ahead of any tenant commitment, whilst also owning the fit-out for the duration of the lease, the landlord has full control of the fit-out design. Therefore some level of compromise on the tenant’s side in the terms of the layout is required, as it is not purpose-built to their requirements.
  2. The tenant cannot be entirely sure about the quality of the fittings and finishes within the space, given the fit outs are often completed prior to any formal leasing campaign being undertaken. This risk can be partially mitigated by the tenant conducting sufficient due diligence with the fit-out company that designed and managed construction of the suite/s.
  3. Spec fit-out office spaces are generally not completed to a point that a prospective tenant can walk in and start working. Most newly fitted out suites are not hard wired to the work-points and require additional power-points to be installed. Depending upon the specific needs of the tenant this can often cost between $800 – $1,000 per work-point.

Summary 

There have been a large number of new leases that have been transacted within tenancies that have been fitted-out speculatively, particularly over the last 2-3 years. It has been a very successful strategy for building owners to attract new tenants to their properties.  

We expect to see plenty more spec suites coming to market in the short to medium term, particularly whilst the vacancy rates in Brisbane remain above the historical long-term average.  

Once the vacancy rates in Brisbane begin to decrease a little more than what they currently are (anticipated within 12 – 18 months), the number of suites built speculatively is expected to decrease. Building owners will be less motivated to commit the upfront capital to construct these fit-outs, particularly without a commitment from the tenant in place. The incentives packages will also reduce in-line with the vacancy rates, and there will be an emphasis on the tenants to contribute monies towards fit-outs themselves. 

 There are currently more than sixty-five (65) spec suites either completed, or under construction within the Brisbane CBD.  

 To discuss your office space needs please contact Caden Office Leasing on info@caden.com.au or call 3014 5406 and ask to speak to one of our leasing operatives. 

 Pictured above: Level 16, 40 Creek Street Brisbane

Author

David Prosser 

Director, Caden Office Leasing 

david.prosser@caden.com.au