Chicago’s Spec Office Suite Market Matures

As tenants lose interest in unfinished offices amid soaring construction costs and delays, demand for spec suites — offices designed, built and furnished by landlords on a hunch they’ll be appealing enough to lease — is exploding.

It’s a big shift from the pre-Covid market. When downtown Chicago office brokers Melissa Rubenstein and Anna Panici started showing spec suites in 2015, the idea was similar to a model home.

JLL’s Managing Director Melissa Rubenstein (LinkedIn/Melissa Rubenstein)

“They were meant to show the tenant what could be done in the building, what the frames and finishes and palettes looked like, so they could take the building’s specs and build something out themselves,” JLL’s Rubenstein told The Real Deal.

Spec offices are no longer showrooms. Instead, landlords are building dozens of them throughout buildings in order to make it easier for tenants to quickly move in.

“All of our clients are actively in the spec suite game,” Rubenstein said. “They didn’t used to be as elaborate and ready to go as they are today.”

She and Panici have leased about 85,000 square feet of spec offices this year across downtown buildings whose landlords they represent, including the Beacon Capital Partners and Ivanhoe Cambridge-owned 515 North State Street, where the firm RealtyAds just snagged a spot.

“So many prospects don’t want to deal with the whole planning process,” said Chicago broker Wendy Katz of Stream Realty.

Stream Realty’s EVP Wendy Katz (Stream Realty)

Her firm leased 150,000 square feet of spec suites in the past three years, including several deals at her client KBS’ West Loop property, Accenture Tower. Stream has deals for another 70,000 square feet of spec suites that were just slightly tweaked by tenant requests, she said, and more are under construction.

“We usually build out a handful at a time, different square footages, slightly different layouts,” she said.

As office demand remains muted in general by the pandemic, landlords across the entire Chicago market, from downtown towers to single-story suburban offices, are pouring cash into building more spec suites. Some kicked off interior construction plans just before the health crisis, and a host of real estate market factors fueled by Covid has accelerated the spec frenzy.

Landlords say having a completed product to show prospective tenants helps convince them that perks that are being added to older buildings and ever more luxurious ones in new developments are worth the cost of a lease and preferable to fully remote work schedules. Building owners also find rolling out spec suites helps control their costs.

“It’s costing our clients less than it would to give tenants an improvement allowance,” JLL’s Panici said.

Spec suites have also grown in size, from a maximum of about 5,000 square feet three to five years ago to 10 times that size in some properties.

“Now we’re getting calls from brokers all the time asking if there are 15,000 to 25,000 square feet of existing conditions or spec suites ready to go,” Katz said.

Landlords working to turn around struggling suburban offices are relying on spec suites, too. Vancouver, Canada-based Adventus is refilling several buildings in its suburban office portfolio of 3 million square feet and has completed two dozen rent-ready suites, some 90 percent of which are leased or in negotiations, the company told The Real Deal.

Even once-overlooked single-story office buildings are getting interest due to spec suite programs.

ONE STORY LLC owner Jonathan Berger (LinkedIn/Jonathan Berger)

Jonathan Berger, who spent $9 million in 2018 to buy a single-story, multi-tenant office building near O’Hare airport and put another $2 million into renovations and amenities, has taken the property to 90 percent full from 50 percent and increased gross rents to $27 per square foot annually from $18. Each suite has its own entrance to make the property less prone to Covid transmission than towers with common areas and shared elevators, he said.

“The other huge advantage is I’m saving $10 to $20 a square foot by not getting the tenant involved in construction,” Berger said. “The spaces that tenants are involved in designing cost probably about 20 percent more.”

Granted, Chicago’s downtown sublease market, which has swelled to a record 6.3 million square feet, poses a direct challenge to spec suites. Because they’re being offered by former tenants, subleases usually rent at a discount, making the secondary market attractive to firms that want a low-cost option and perhaps a short-term commitment to a space ready for an immediate move-in.

“Subleases, absolutely we compete with those,” Katz said.

Yet spec suites offer more flexible terms than the traditional 10-year minimum. Katz said KBS wants a minimum of five-year spec suite leases at Accenture in most cases, while other landlords have allowed three years and Berger even offers one-year leases, with a rate hike for renewals.

“I will do one-, two- and three-year deals, and I find my tenants tend to be sticky,” Berger said.

The pandemic-induced shift in office designs – more gathering areas than private office space, fewer desks for individual work that’s increasingly remote — also dampens sublease demand compared to spec suites.

“These subleases in many cases need a lot of work,” Katz said.

The rise of the spec suite has also added new duties for the brokers representing landlords, who now play a more direct role in shaping a building’s finishes, just as the layouts of offices are shifting.

“Anna and my job as leasing agents has completely evolved during Covid,” Rubenstein said. “Now we have to wear an architect hat, an interior designer hat and we have to nail it, we have to get it right.”