Nashville’s office market has not been immune to the current economic headwinds and has started to see a slowdown in office leasing demand. Many landlords are executing speculative suite (spec suites) programs in both newly constructed and second generation buildings as a way to attract tenants in a highly competitive market. These efficient and move-in ready office suites provide premiums for landlords regarding rates and allows tenants to become operational within 30-90 days.
This report examines the trends and demand for spec suites across the Nashville market and shows how landlords can navigate towards continued occupancy.
Traditionally when landlords market and lease office space, they will provide floorplates in shell condition, without the interior built out. It’s then the tenant’s responsibility to complete the space with paint, plumbing, carpeting, electricity, and other finishes, usually with the assistance of a Tenant Improvement Allowance (TIA) from the landlord.
Speculative suites, often called spec suites, take a different approach. Spec suites are move-in ready office spaces that are built out and designed by the building owner prior to a tenant signing a lease.
KEY POINTS
- Spec suites have become increasingly popular throughout Nashville’s urban core as it allows tenants to take occupancy and become operational within 30-90 days.
- These spaces allow flexibility for tenants by providing shorter lease terms, an attractive option for startups, new-to-market, and company expansions.
- Landlords may charge roughly 10% - 15% higher lease rates on spec suites than direct space.
THE RISE OF SPEC SUITES
Prior to the pandemic, spec suites were utilized by landlords to market smaller or less desirable space to tenants. However, as the office market in Nashville has become increasingly competitive, spec suites have gained in popularity. Construction costs, permit delays, and prolonged buildouts have become significant obstacles for tenants seeking office space. Spec suites allow for these costs to transfer back to the landlord, removing these barriers to entry for many companies.
AVAILABILITY OF SPEC SUITES IN MUSIC CITY
Properties spanning from second-generation towers to newly constructed assets are all utilizing spec suite programs within Nashville’s Urban Core.
HIGH COMPETITION & DEMAND SLOWING
In recent years, Nashville has attracted huge corporate relocations and expansions due to a lower cost-of-living, tax friendly initiatives, quality of life, and low real estate costs. This economic growth has spurred office market growth as significant names including AllianceBernstein, Oracle, Revance Therapeutics, Amazon, Capgemini, and others have moved to Nashville.
Since 2019, Nashville has added roughly 8.0 msf of new office product as developers raced to match demand. However, Nashville has not been immune to recent economic shifts and headwinds. Leasing activity is down 13.0% YOY with trends projecting 2023 to be a slow year for both leasing volume and capital markets. Many of these newly constructed buildings have been slow to lease up, resulting in a vacancy rate of 18.9%. These factors have created an extremely competitive office market where landlords are being forced to come up with new ways to increase occupancy.
Along with increased concessions and tenant improvement allowances, spec suites have become a new way to drive tenant demand. These suites can appeal to companies that are growing rapidly and have outgrown their home offices or coworking spaces. They allow for tenants to sign flexible lease terms as many companies in today’s economic climate are reassessing their office footprints due to cost cutting and work-from-home strategies.
SPEC SUITE BUILDOUT COSTS OFFSET BY PREMIUM RENTAL RATES
The cost for landlords to build out spec suites is significantly higher than providing unfinished shell space. On average in the CBD, spec suites can cost $80 - $110 per square foot (psf) to build out compared to roughly $30 - $50 psf for shell space. However, landlords can underwrite these costs due to the increased demand and rent premiums that spec suites command. For example, in Nashville’s top performing submarkets (Midtown, CBD, CSF, Green Hills/W. Nashville, and Brentwood) landlords can capture an average of $1.50 - $3.00 psf more than their rates on direct space.
Over the past five years, the average spec suite lease was signed at 3,951 sf, compared to traditional deals which averaged 10,241 sf.
SPEC SUITES: ALL INDUSTRIES TAKING SPACE
Since 2018, spec suite lease terms have averaged roughly five years with a wide variety of industries occupying space. The most active tenants were those in Accounting/Finance, Business Services, and Legal Services.
OUTLOOK
Nashville’s utilization of spec suites will continue to rise as they gain popularity with both landlords and tenants. With the office market facing headwinds, spec suites provide landlords with a way to regain lost occupancy from smaller-sized tenants that may be new to the market. Even though ownership takes on the burden of spec suite buildout costs, tenants are willing to pay premium rates to help offset those costs.
