Many folks working in commercial real estate agree that offices need to be especially appealing nowadays to entice people back to the office. But who ultimately covers the initial cost of an upgraded office: the landlord or the tenant?

Well, that depends. A recent report by real estate firm Colliers shows many building owners have found leasing success by building out “spec suites.” A speculative suite is a pre-built, market-ready space built out by a building owner with no immediate prospective tenant, Colliers’ executive vice president Kevin O’Neill told TCB in a Thursday interview.

“This means that instead of a company putting the investment into a space’s high-end amenities and finishes in an office space, the landlord takes on those investments to attract tenants,” he said. “For tenants, sometimes they don’t want the hassle of going through the space planning and construction process, which can take months and months. So the landlord is trying to make it easier for tenants to just move into a space.”

Since Covid-19, spec suites have become increasingly prominent in the Minneapolis-St. Paul market, Colliers noted in its 2023 fourth quarter report issued Thursday. There were five spec suite transactions in 2021 and 25 in 2022. This trend continued in 2023. These suites are also leasing faster and at higher rates. In 2023, spec suites leased 46% faster than their non-spec counterparts, according to the report.

Many buildings across the Twin Cities and in the suburbs — particularly high-demand Class A buildings — are building out these suites. While there have been some spec suits built in new developments in past years, the suites can also be built in portions of otherwise occupied buildings. For example, downtown Minneapolis buildings like 60 South 6th office tower (formerly RBC Plaza),  AT&T Tower, and the IDS building have built out spec suites.

“It’s taking some of the vacancies within a project and building them out,” O’Neill said.

In the case of a spec suite, the landlord has to spend a large amount of capital on a space in anticipation that the suite will ultimately lease quicker than if it wasn’t outfitted with amenities. Because of this cost, spec suits are not typically very large, usually running between 2,500 to 10,000 square feet and the rent runs higher than a non-spec office would. That tracks with a broader shift toward smaller offices with better amenities.

In 2019, Minneapolis-based Ryan Cos. began the development of 10 West End, a rare spec office project that quickly filled up within a year of opening. O’Neill said he represented a group that ultimately moved to a spec suite in the completed 10 West End. The space was entirely furnished and the client could move in immediately.

“It’s really just a way for landlords to increase occupancy and to just provide a really attractive environment post-Covid to bring employees back to the office,” O’Neill said.

In most cases, spec suites are used as a tool to decrease vacancy. Once a building is stabilized at around 90% or more occupancy, it’s likely the owner won’t build out more spec suites. But O’Neill noted North Loop Green is an example of a project offering only spec office space, “and that’s the only spec building out there.”

While these spec suites are leasing quicker than non-spec, O’Neill noted that they only represent a small fraction of the market, likely under 10%. Area office vacancy rose 6.25% in Q4 of 2023, rising from 12.8% to 13.6% year-over-year. Many of the largest corporate renters have begun downsizing office space and consolidating operations. The report notes multiple major office transitions geared toward right-sizing space: Best Buy placed two of its corporate campus buildings on the market, United Healthcare began consolidating, AT&T left its namesake tower, and Thomson Reuters put its office on the market and signed onto a sublease in the former Prime Therapeutics building.

Landlord concessions, especially in Class B buildings, are growing. All in all, the office shift is trending toward more tenant-friendly terms, the report notes.

In the report, O’Neill said “I think we’ll see the Class A market become as vacant as the B market in 2024. What’s happening here is a lot of these larger companies are right-sizing. They’re in Class A buildings.”