When real estate experts reflect on the past decade, the build-to-suit (BTS) market will be among the high points. Following the end of the real estate debacle in the early 1990s, the industry primarily shunned speculative development because of its inherent risks.
Hence, BTS gained favor. That trend isn't expected to change anytime soon. In fact, the industry appears to be more vibrant than ever as it enters the next millennium. This vibrancy can be attributed to two underlying trends:
- First, the considerable amount of speculative office development that has occurred in the past few years has given lenders the jitters.
- Second, the burgeoning tertiary markets, where spec office development is virtually non-existent, provides an ideal opportunity for BTS developers.
Indeed, the pendulum appears to have swung once again in favor of BTS development vs. a spate of speculative office development during the past few years. "I think you're seeing almost a reverse trend starting, and I think you will see it in 2001," says Todd Yates, senior vice president of national development and general manager of the Southeast region for The Alter Group, Skokie, Ill.
"A lot of the lenders are very concerned that the suburban office market in general is getting overbuilt," continues Yates. "The Fed has come up with a report that's redlined 15 major cities because it thinks the office sector is being overbuilt, which Atlanta and almost every other major submarket is. I think what they're trying to do is wave the flag saying, `Hey, you guys all remember the early 1990s. We don't want to get there again.'"
And while industrial BTS has a long history in secondary- and third-tier markets, office BTS in tertiary markets is still a relatively new product, explains Yates. For example, when Columbus, Ga.-based American Family Life Assurance Co. needed more than 200,000 sq. ft. of space, it turned to The Alter Group to provide a BTS. "Nobody is going to build that much spec space in Columbus, Ga., whereas in places like Atlanta, Dallas or Chicago, a tenant could find a couple hundred thousand square feet in one of a dozen new buildings."
However, there is a governor on all this optimism concerning the potential for the BTS sector, Yates cautions. "It's only the well-capitalized companies that are going to have the ability to do BTS in the future," he says.
Specifically, recent volatility in the stock market coupled with earnings losses among high-tech companies have prompted the commercial real estate industry to focus on credit-worthy tenants more than ever before.
Keys to success in build-to-suit development Given the popularity of this building method, what distinguishes one developer from another? For one thing, success depends largely upon a BTS developer's willingness to truly listen to the client and discern that particular company's real estate needs. The goal is to deliver the most efficient, high-quality space possible while meeting those needs.
Not everyone can fill the bill. "There are hundreds of general contractors that can build a building, but there are very few that can help a client think through its business processes and develop a real estate solution,"states Gene Zink, chief financial officer of Indianapolis-based Duke-Weeks Realty Corp. "That's the difference between those two groups."
Another important factor in the success of this business is the consideration of a company's future growth potential in the design and planning of a building. "A company may be X large today and 3X tomorrow. Going into the design and planning of a BTS, the issue is not only how I will take care of my 1X now, but also how I will satisfy my need for the 3X," explains Zink.
A BTS developer must be able to respond quickly to a client's request and fast-track a project. Highly capitalized developers have an advantage, according to Yates. "We can start projects without construction loans or permanent loans in place."
What follows over the next five pages is NREI's annual Build-To-Suit Directory, which this year includes 48 companies. We appreciate the cooperation of the companies listed. We've presented the information in a concise format. As always, we welcome your input.