Weighing the Pros and Cons of Spec Buildings

By Tori Ung, Location Analyst with Austin Consulting

When looking to expand or relocate into a new territory, many growing companies start a property search with hopes that an available building suitable for their needs is on the market. Existing buildings are attractive because the overall cost of the project will typically be cheaper and the company will be quicker to market, saving the company two key resources: time and money.

A community with a good portfolio of existing buildings will be placed into the running in the early stages of a property search. Unfortunately, if your community is similar to 95% of the communities in the country, existing buildings compatible to the needs of prospects are few and far between. And, if there is a property that has been sitting on the market for a few years, it possibly has one or more deficiencies. What are your options?

Naturally, the idea of speculative (“spec”) buildings could be a solution to this problem. Spec buildings are typically funded by developers or a community EDO anticipating the demand for existing structures. Needless to say, though this theory seems like a gold mine, communities and expanding companies must consider the benefits and risks when determining whether this is the best investment decision.

Benefits

For prospective companies looking to relocate, spec buildings have some obvious advantages. The building is constructed on a site with all of the site due diligence completed. Permitting has been completed, utilities are generally located to the newly constructed building, and planned road access is complete, providing all the makings of a brand new building on the market.

For companies, this route can be attractive, as it may be a cheaper and quicker alternative, with reduced site work and construction costs. Be aware, however, that the developer must recoup their construction and possible financing costs somehow and those costs may be included in the purchase price. The time of construction would be saved, along with avoiding risks associated with unknown and unforeseeable subsurface conditions. This option provides time savings that may allow a company to be up and running months, if not years, sooner than anticipated.

Risks

Of course, spec buildings also carry risk. Spec buildings constructed with no owner in mind are built using educated guesses on a one-size-fits-all building size, location on the selected site, and virtually no guidance on layout, materials and specifications. No one can foresee the needs of a prospective client and by building a spec building, an EDO could in fact be limiting the range of prospects. For example, prospective food and beverage operations typically require more water, power, gas, higher roof loads to handle equipment, etc., than does a light manufacturing operation. If a spec building is under-built, that could eliminate prospective food processors.

On the other hand, communities also run the risk of over-building with higher-grade construction materials and not get their return on investment, should a prospective client not require that grade of materials, such as manufacturing. There are ways, however that a developer can hedge its bets.  For example, it can defer having the floors poured, which will allow prospective clients to dictate pad thickness and drainage requirements.

Lastly, perhaps the largest risk EDO’s run is not only constructing a building which could sit on the market indefinitely, but also the land the spec building now sits on must come off the market from a site search.

 

Spec buildings can be a great opportunity, if they truly meet your needs. If you are a company looking to expand, or an EDO contemplating these decisions, it is recommended that you partner with a third-party consultant that can help you weigh these pros and cons to make the best decision for your current and future needs.