“Spec building” increases in Washington area

February 17, 2013

A speculative development, or “spec building,” is one in which developers begin construction with no lease commitments for the space. The amount of spec building under way throughout Washington’s commercial real estate market has been increasing of late, with the majority of this unleased development space concentrated in Northern Virginia.

Although a spec building could sit vacant after completion, leaving the developer on the hook for the building’s operating expenses and taxes with no rental income, more developers seem willing to take that risk. Essentially, they are hoping to time the market and offer a large amount of new space just when businesses are looking for space.

Because of the higher risk involved, an increase in spec development is often viewed as a positive indicator for a market, one in which developers, and their lenders, expect improved leasing activity in the near future.

One of the first and biggest spec buildings currently under construction, which appears to have served as a catalyst and prompted other speculative developments to follow, is Monday Properties’ 1812 N. Moore St. in Rosslyn. It will be the tallest building in the area and total more than 580,000 square feet when completed.

Other major spec developments that have since followed Monday Properties’ lead include Tysons Tower, which Macerich started building without a tenant but recently inked a deal with Intelstat for just under 200,000 square feet in the 524,000-square-foot building. Lerner Enterprises recently broke ground on a 476,000-square-foot spec building in Tysons, and Lowe Enterprises is currently developing a 300,000-square-foot spec building in Crystal City. In total, there are currently 12 spec buildings under construction in Northern Virginia alone.

Why so much spec development? According to developers, one reason is the appeal more-efficient and sustainable new space holds for companies. After location and cost, environmental impact is becoming more of a factor in the workplace, and many companies in the region would prefer to occupy energy efficient LEED-certified space, given the option. Almost every new building is designed to qualify for LEED certification. Monday Properties, for example, designed and built 1812 N. Moore to achieve LEED Platinum, the highest designation level conferred by the LEED program.

Spec building also enables companies to have their space customized to suit their specific design preferences without having to wait up the to two years it can take to design and build a new building.

Timing is everything in regard to spec development, and time will certainly tell if the gamble pays off for the spec developers in Northern Virginia.

Charles Schwieger is a member of CoStar Group’s Washington research team.

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