Are Speculative Office Fit-Outs Worth Investing In?
Office vacancy rates are finally stabilising across Melbourne, but the market still hasn’t reached pre-pandemic highs. In the Melbourne CBD alone, office vacancy rates have risen to 13.8% in 2023. Vacancies haven’t been this high since 1999.
Competition is getting fierce among property owners, each looking for new ways to attract long-term tenants. One way to catch the eye of a prospective tenant? The speculative office fitout.
Making your property move-in ready could put your listing at an advantage. But is investing upfront with no tenant secured worth the risk? Let’s weigh up the pros and cons to help you decide if speculative office fitout is right for you.
What Is a Speculative Office Fitout?
A speculative office fitout (or spec fitout) is a fitout done ‘on spec’. It is a new fitout built to meet the general needs of a prospective tenant. There is no pre-commitment by a tenant before its construction.
Since there is no tenant locked in at the time of construction these types of office fitouts are built to meet the needs of a wide range of potential businesses looking for office space. There is usually a reception area, kitchen, meeting/breakout room, and sometimes a data or IT room.
The floor plan is mostly open; and includes just enough features to help prospective tenants visualise how their business could use the space.
Why Build a Fitout With No Tenant?
You don’t have a tenant. And you don’t know if prospective tenants will like your spec fitout. So why build one in the first place?
For businesses looking for a new space, an empty shell is an empty shell. It can be hard to weigh up the pros and cons of space that has nothing in it, meaning that landlords need to rely on external factors (e.g. parking, public transport, convenience, etc.) to pique the interest of potential tenants. And for businesses that are growing quickly, they may not want to spend time building a fitout from scratch.
Spec fitouts are a way for landlords to differentiate their property from other competitors. Tenants can walk in, look, touch, and imagine themselves in the space. Comparing a spec property to other empty shell office spaces, tenants may be drawn to the convenience that a completed property provides.
Spec Fitout Benefits
There are many reasons why more landlords are building spec fitouts. And there are even more reasons why tenants like them.
- Shorter Time Between Vacancies: Tenants can move in quickly and start renting sooner. At the end of a lease agreement, tenants do not need to spend time completing strip-out. If the property is left in good condition, landlords can start finding new tenants immediately.
- Choose Your Lease Incentives: With a completely fitted-out space, you have more flexibility in the types of incentives you can offer tenants. You can offer incentives (like rental abatement) that encourage tenants to rent for longer terms. There also isn’t an expectation for landlords to subsidise fitout costs for tenants.
- Design & Quality Control: Spec fitouts are like investments. The more you put into them, the more you differentiate your property from others. Landlords can build high-quality, trending fitouts that match the type of tenant they wish to attract.
- Charge Higher Rent: With a new, move-in-ready property, some tenants may also be more willing to accept above-average rent. Especially if the property meets or exceeds their needs.
- Zero Risk, No Upfront Costs: The cost and delivery of the fitout are the responsibility of the landlord. Tenants don’t have to go through the extra step of finding the right contractor for their space. They also don’t take on the additional risk that comes with building a space from scratch.
- Lease Flexibility: With a completed space, tenants have more flexibility on lease terms with landlords. There’s no need to lock into 5+ year leases and since the space doesn’t need to be built, tenants can move in and trial the space for a few years before committing further.
- Try Before You Buy: Tenants actually experience the space before they sign an agreement. This aspect alone could be the deciding factor for many tenants.
- Financially Attractive: While lease incentives are common in office lease agreements, a space becomes significantly more attractive when landlords offer incentives (e.g. zero/reduced rent periods) along with a spec fitout. This significantly drives up the value of the property, especially for growing businesses that want to find a space fast.
Challenges to Consider
The fact that everyone wins- both landlord and tenant - is what makes the spec office fitout increasingly popular. But there are some things both parties must consider during the process.
- A Level of Risk: With no tenant locked into your property, landlords can’t be completely sure that their space will be purpose-built for a future tenant. A lot of research needs to be done to create a space that matches current office trends, while also providing flexibility for different types of businesses.
- Upfront Costs: Spec fitouts are an additional upfront cost (outside of marketing and advertising) to help attract a new tenant. Some landlords may be wary about putting extra money into a space if they can’t see the long-term benefits a spec fitout could provide.
- Compromise Over Customisation: Tenants must accept that some features of the design cannot be changed.
- Minor Setup Costs: While tenants don’t have to worry about doing an entire office fitout, there may be additional costs in setting up power points at key locations in the office. There may also be costs to set up IT equipment and internet.
Start Building Your Spec Office Fitout
Right now, competition around office tenancies remains strong across metropolitan Melbourne. Growing businesses have a tight leash on their expenses, and may be less willing to take the risk of building their own office fitout.
If you’re a landlord with vacant office rental property, installing a speculative office fitout could help differentiate your property from the rest. At Canopy Fitouts we help businesses make the most out of their spaces, turning uninspiring properties into coveted workspaces.
Speak to our team today and we’d be more than happy to give you advice on cost, budgets, requirements, and timeframes for your spec fitout. Give us a call at 1800 434 868 or email firstname.lastname@example.org and let’s bring your vision to life.