KBS Realty Advisors among office landlords betting on spec suites amid Covid pandemic



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Real Estate Editor, Charlotte Business Journal


The Carillon landlord in uptown is going all in on a speculative-suite program at the 24-story tower and other buildings it owns in the United States.

Allen Aldridge, senior vice president of acquisitions, dispositions and asset management at KBS Realty Advisors, said of the real estate firm’s office portfolio, spec-suite activity has been particularly robust at the Carillon. The company last year built out seven spaces ranging from 1,500 to 14,000 square feet at the building.

So far, two of the suites are committed, one has a letter of intent and a fourth has two interested parties in discussions, Aldridge said. Newport Beach, California-based KBS acquired Carillon in 2016 for $147 million.

“(Last year), we immediately looked at going into capital mode — repositioning buildings, redoing common areas on the ground floor and main-entry areas, and in addition, expanding our spec-suite programs,” Aldridge said. “Carillon was probably the biggest one in terms of number of spaces.”

Spec suites, essentially turnkey office space, are by no means a revolutionary concept. But some real estate owners like KBS are reporting greater success in leasing those types of office spaces during the Covid-19 pandemic as compared to traditional space, especially in older towers.

In fact, Aldridge said, even though uptown Charlotte has been one of the slower office markets in KBS’ portfolio to rebound since Covid-19, interest in spec suites has outpaced traditional office space.

Even in new buildings, landlords are doubling down on the trend. At Bank of America Tower, for example, owner Highwoods Properties (NYSE: HIW) started a spec-suite program in the fall and recently leased the first space to law firm Haynes and Boone. At Camp North End, ATCO Properties & Management and Shorenstein Properties recently finished building out a 45,000-square-foot office suite at the property’s Gama Goat Building.

As some companies look to downsize or become more efficient with their space, spec suites can provide a compelling option. Spec suites frequently have shorter or more flexible lease terms, which could provide a degree of comfort to companies still unsure what their office space needs will be in a post-pandemic world.

There are also non-pandemic-specific tailwinds for prebuilt office space. A 2018 Newmark report found spec suites in Washington, D.C., leased up in an average of 3.4 months, compared to 16.5 months for customized space. Owners were able to charge a 10% to 20% premium for spec-suite space, given the flexibility in lease terms compared to traditional space, Newmark found.

Companies can move into a spec suite faster than building out their own space, thereby avoid a lengthy permitting process, Aldridge said.

Having a spec suite ready to lease is akin to a model home in a residential community, he continued.

“It’s built out, it’s clean, it’s modern, there’s new carpet, it just shows well and leases well, historically,” Aldridge said. “In a pandemic situation, that’s accelerated and even more magnified.”

At Carillon, Aldridge said he expects KBS will soon embark on another round of spec-suite buildouts soon, perhaps four or five additional spaces.

Although spec suites may traditionally be smaller spaces — less than 10,000 square feet — some owners are thinking bigger. In Atlanta, KBS recently did a full-floor spec suite that was 25,000 square feet. Aldridge said KBS spent about $53 per square foot renovating that space, and provided the company that leased it about $10 per square foot in tenant-improvement allowance.

Without the upfit KBS completed before bringing it to market, Aldridge said it may have taken another year to lease it. A higher overall capital spend would have also been needed — potentially up to $80 per square foot in TI allowance, Aldridge said.

The full-floor spec suite in Atlanta was leased two months after delivery, he continued.




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