Taking the Leap Into Spec Office Development
Plenty of opportunities exist for speculative office development, as long as developers make smart decisions about where and what type of product they develop, according to panelists at NAIOP’s inaugural O.CON, The Office Conference, held at the JW Marriott Houston on June 24 and 25. Speakers at the spec development session moderated by Carleton Riser, president, Transwestern Development Co., discussed where, why and how they are currently developing spec office projects, as well as how they are financing them.
The market appears ripe for additional spec development, Riser noted, since “the amount of office construction underway today is below the long-term average, and significantly below past peaks.” Demand is outpacing supply, and there has been a “flight to quality, with lots of tenants willing to pay more to be in nicer, more modern buildings. This situation bodes well for additional office development as we move forward.”
Dirk Mosis, III, executive managing director, USAA Real Estate Co., noted that USAA started superficially looking into going spec about three years ago, exploring areas with significant job and population growth. In the past two years, the company has either started or is about to start construction on nine 100 percent spec projects and two that were partly preleased, in addition to three build-to-suit projects. Today, those 11 spec and partly preleased buildings — located in Seattle; San Jose, California; Phoenix; Dallas; San Antonio; Austin, Texas; and Hoboken, New Jersey — are about 55 percent leased. USAA is now looking into additional spec office development projects in Atlanta, Chicago and Denver.
Adam Saphier, president, central operations and capital markets, Trammell Crow Co. (TCC), said that of the 20 office buildings TCC currently has underway, 13 are entirely spec, with no preleases. “The most important thing for us is job growth,” he noted. “We believe there’s a direct correlation between job growth and office absorption… We went very long, very early in Texas. … The other geographies that have come around since then, that we’ve gotten into recently, are Seattle and Phoenix.” Beyond job growth, TCC looks to develop projects with the most competitive advantages possible, that give them a truly differentiated value proposition in a competitive environment.
“Construction loans are a lot more conservative in this cycle,” Saphier added, so purely spec projects are much more difficult to finance and require more equity and/or more creative approaches.
When asked what’s being done differently in terms of product type in the current development cycle, Greg Fuller, chief operating officer, Granite Properties, Inc., noted that three years ago, when his company began a speculative development at Granite Park in north Dallas, “we created what we called a ‘corporate living room,’” which grew out of a conversation about millennials socializing at Starbucks. “What if we took all of [the usual office building] amenities and put them in the best location in an office building, the lobby?” Fuller asked. The resulting building “leased faster than we had leased any other speculative building in our history” and is garnering more than 20 percent in rent than another, similar Granite building three miles away without the same amenity base. Office buildings with attractive amenities within them or nearby, those that offer an appealing live, work, play environment, “are the ones that are winning in this cycle,” Fuller concluded.
Saphier added that office occupiers these days have four priorities:
To attract and retain talent with their real estate.
To minimize occupancy costs by making more efficient use of their space.
To improve employee productivity and well being.
To bring their culture into the space.
“When you wrap all that together, what we’re really trying to do on a spec building is create flexibility and allow for choice. The “great room” concept, which we’re also doing in our buildings, is a great way to allow choice and flexibility in where and how people work.”