hat is build-to-suit?

Build-to-suit (BTS) is a commercial real estate approach where a developer or landowner constructs a custom property designed specifically around a tenant’s operational needs. Typically, a tenant will engage an experienced BTS developer. In some cases, the tenant will buy the land and construct the property themselves. Rather than leasing an existing building or retrofitting a second-hand space, the tenant and the developer design a building to accommodate the company’s specific operational needs. In today’s market, when speculative development has slowed and developers are motivated to place deals, build-to-suit (BTS) pricing can be surprisingly competitive.

Hidden costs of older buildings

Purchasing a foreclosure property is highly competitive and inherently risky. True foreclosure opportunities are uncommon in today’s market, and buyers pursuing discounted or value-add assets in hopes of securing a below-market deal must treat the process as a full-time job. In addition, many of these older properties require substantial capital investment to meet modern operational standards—often including HVAC replacement, code compliance upgrades, power enhancements, loading modifications, and efficiency improvements. By the time these retrofits are completed, the perceived “deal” often no longer makes financial sense.

A buyer’s wake-up call

A few years ago, a buyer wanted to purchase a warehouse building.He submitted an aggressive sealed bid on a foreclosure property. Although the building was located farther than he wanted to commute every day, but he hoped a low purchase price would justify the added travel time. He based his bid on what he was willing to pay for the building plus the cost to retrofit the building to meet operational needs. His offer ended in a tie with another potential buyer, and he was asked to resubmit a higher offer, which he did.

Today, a similar dynamic is playing out with value-add industrial products. Another buyer recently pursued an older warehouse requiring significant updates, again banking on the idea that a lower purchase price would balance out retrofit expenses and operational inefficiencies. But even with these concessions built into the underwriting, competition remained strong and they were also asked to submit a revised offer.

BTS enters the conversation

When the brokerage team requested BTS proposals based on the buyer’s needs, multiple contractors submitted strong, well-priced bids. Thanks to stabilized material costs and improved supply chain lead times, the total cost of a brand-new, customized facility came in below the upgraded price of the older building. The buyer withdrew his offer on the second-generation warehouse. It didn’t make sense anymore.

Why BTS works today

After several years of volatility, supply chains have returned to normal. Contractors are motivated to keep crews working, which has made bidding more competitive. Concurrently, reduced land values in many submarkets are improving the economics of new construction. Developers holding entitled or partially improved sites are also more flexible today, offering creative deal structures and stronger BTS pricing as speculative activity slows.

Essential ingredients needed to take advantage of today’s market:

1. Buy with patience – engage a seasoned professional to evaluate the total cost of occupancy, not just upfront pricing. Knowledgeable commercial brokers offer this expertise. 
2. Work with innovative, experienced commercial broker(s) who think outside the box and have a working knowledge of the marketplace
3. Find a willing and able seller who may even consider seller financing at reasonable rates.
4. Hiring a commercial contractor who wants to keep subs and employees working

A smart time to act

Market conditions dictate if  BTS pricing is advantageous over the cost of renovating older facilities. Custom development eliminates retrofitting a second-hand space and positions businesses for future growth with a facility designed to meet their needs from day one.