Build-to-suit activity strong

Real Estate Weekly, May 17, 1995

During the 1990s, the supply of product that did exist was comprised of small, obsolete facilities rendering it impossible for large industrial users to locate adequate facilities. As a result, build-to-suit development increased dramatically.

Build-to-suit is a method of leasing property whereby the lessor builds according to the tenant's specifications. The cost of construction is figured into the rental amount of the lease, which is usually for a long term.

In 1994, a total of 21 million square feet of build-to-suit activity occurred, as compared to 15.1 million square feet in 1993.

Build-to-suit activity has remained a preferred method of construction because of the turbulent economy of the early 1990s, averaging 17.3 million square feet per year. Since 1990, 87 million square feet of build-to-suit properties have been built. There has been very little speculative construction over this same time period.

"Build-to-suit activity has virtually replaced speculative construction for industrial properties in some markets," said Rick Hughes, managing director, client services, Eastern Region, of Cushman & Wakefield. Hughes pointed out that speculative construction is occurring in such markets as Dallas, Atlanta and southern California.

Of the major markets, Atlanta has been the most active build-to-suit market during this period, with 21 million square feet completed, or 24 percent of the total. Nearly 4.5 million square feet was completed in Atlanta in 1994. The largest facilities were built for Nestle Distribution, Whirlpool and the U.S. Postal Service.

Warehouse/distribution facilities make up the bulk of the activity in Atlanta. Of the 21 million square feet completed there since 1990, all but 420,000 were warehouse/distribution facilities. Nationally, 77 percent of all build-to-suit projects since 1990 have involved warehouse/distribution facilities.

Chicago, Philadelphia, Los Angeles and St. Louis are other active markets. Currently, there are 13.6 million square feet of build-to-suits under construction in the 19 major markets surveyed by Cushman & Wakefield. These projects are slated for completion over the next 24 months. Cushman & Wakefield expects that throughout 1995 and 1996, a total of 25 million more square feet of new build-to-suit activity will have occurred.

"We are optimistic about the build-to-suit market for industrial activity," Hughes said. "However, we do expect it to taper off as speculative industrial development in soma major markets begins to take shape."