JUST ONE FACTOR FUELING BTS DEVELOPMENT
For the last seven years, industrial real estate users gravitated towards the abundance of vacant buildings created by the “Great Recession.” As the market has recovered, that
abundance of vacant buildings has quickly turned into downright
scarcity. The lack of quality space has led many users to look at an
option that they would have never considered in 2010, a build-to-suit (BTS). The current market forces have created a surge in BTS
development and we believe that this will not be a short-term trend.
Everyone from the largest e-commerce users to regional companies
are finding value in BTS solutions for their distribution needs.
For the brokerage community, understanding the BTS process
is essential to ensuring client satisfaction. The key is to set
clear expectations for your client and surround yourself with
an experienced and capable team. Ground up construction is
inherently more complicated than leasing or purchasing an existing
building, but there are a number of ways to streamline the process
and mitigate risk.
HOW MARKET FORCES FUELED THE GROWTH OF BTS
A lack of existing product is not the only factor contributing to the
increase in BTS activity. First, industrial users have increasingly
specialized requirements for their facilities. Whether it is clear
height, trailer parking, outside storage or security requirements, the
standard speculative building or 10 year old facility does not meet
their demands. Secondly, the speculative development community
is concentrating on the “big box” distribution product. Most spec
buildings are at least 400,000 square feet in any market that I travel
to and most are over 600,000 square feet. The majority of tenants,
who occupy less than 200,000 square feet, are being ignored by the
new developments and their options are very limited.
ADVANTAGES AND DISADVANTAGES OF BTS
There are numerous benefits that industrial users find in BTS
facilities: building specifications, location, expansion capability,
single tenant occupancy, and additional security.
First and foremost, a user can get exactly what they need where
they need it. Because the building is custom built to their
specifications, they can ensure it satisfies all their requirements for
an efficient operation. Many companies have similar space needs
in multiple markets and can benefit from developing standardized
facility designs. Having standardized facilities can help improve
consistency across the supply chain, improve employee safety and
minimize interruptions during the move in process. Being able to
select an optimal location allows users to save on transportation
costs, improve proximity to major customers or suppliers, and take
advantage of local incentives.
A BTS facility also allows the client to have greater control of their
future and their environment. A high percentage of the facilities that
we have built incorporate some additional land designed for future
expansion. Unlike a one-time right of first refusal offered in an
existing building, expansion land cannot be leased out from under
the client. That land is exclusively at the user’s disposal and can be
utilized at their discretion. The other issue that is becoming more
important to users is site and product security. In addition to the
traditional list of security concerns, many governmental programs
like Foreign Trade Zone (FTZ) and Customs-Trade Partnership
Against Terrorism (C-TPAT) have strict security requirements for
compliance. A single tenant building offers the highest level of
security and the easiest path to compliance.
There are two excuses that we consistently hear as to why clients
shy away from build to suit: the cost of building new and the time
and effort it takes to build.
There is no getting around the timing issue. If a user needs to occupy
a building in 30 or 90 days, a BTS is not an option. However, we
find that perception is much worse than reality and most users do
have the time to pursue a BTS facility. The lack of existing product
currently available in the market has forced users to focus on
looking for new space 12 to 18 months before their lease expiration.
With rare exception, that is plenty of time to design and construct
a new building.
By Curt Hefner, SIOR