GlobeSt.com SPECIAL: More Large Industrial Users Favor Build-to-Suits over Spec Projects

ORLANDO-Speculatively built industrial structures are heading for the sidelines as more and larger build-to-suit ventures gain favor with big space users, area brokers tell GlobeSt.com.

“Build-to-suits have become a trend to watch for several reasons,” CB Richard Ellis Inc. industrial broker David Murphy tells GlobeSt.com. “Our speculative market has decreased dramatically under adverse market conditions, leaving room for developers to provide build-to-suit options to tenants.”

Additionally, large industrial tenants have begun a consolidation trend, particularly in the logistics sector.

“These tenants are opting for fewer locations but very large industrial boxes, many times in the 500,000-sf or larger category,” Murphy says. “Regardless of market, there are typically few speculative projects available of this size at any given time, so they end up as build-to-suit candidates.”

In the metro Orlando market, George D. Livingston, founder/chairman, Realvest Partners Inc., Maitland, FL sees a growing build-to-suit market for both office and industrial product.

“Major national corporations typically want the best locations, the lowest cost and the highest return on their investment,” Livingston tells GlobeSt.com.

“Location is a big factor” in selecting a build-to-suit site and “most location decisions hinge on one of three factors,” the developer says.

“Some companies want to locate in the Lake Mary, FL area so they can be close to their clients,” Livingston points out. “Others want to be located near the interstate so they can get their products to their customers most efficiently. Often, however, build-to-suit locations depend mostly on where the president of the company lives.”

CBRE’s Murphy says “typically, larger companies with excellent credit and a willingness to sign a 10-year-plus lease are the best candidates” for build-to-suits.

Although several build-to-suits have been successfully completed in metro Orlando for smaller companies, Murphy maintains the build-to-suit product generally works out best for the larger user and the property owner.

“There is a reluctance by the smaller companies to enter into a lease longer than five years, making it difficult for the developer to reach his objectives,” Murphy tells GlobeSt.com. “Every tenant seems to want maximum flexibility today, with early termination and expansion opportunities.”

But that scenario “doesn’t bode well for the capital markets’ preference for a longer-term commitment, so the result is the desire from the sources of capital to receive a higher return, given less than optimum lease terms achieved.”

However, a plus factor that spec developers have over their build-to-suit brethren is the ability to provide shorter lease terms.

“As long as lenders and tenants continue being on opposite ends when it comes to lease terms, the challenge to effectively finance a build-to-suit will remain,” Murphy says.

To compete head-on with spec developers, build-to-suit developers must have well-located sites ready for development and a process of responding to tenants’ needs quickly.

“Being able to effectively respond quickly to a potential tenant, before they are already down the road with a competitor is absolutely critical,” the broker tells GlobeSt.com. “A developer’s ability to handle multi-marked build-to-suit requirements is also emerging as a critical factor for the larger tenants.”

Central Florida’s industrial vacancy rate jumped by 1.1% in the second quarter to 10.2%, the highest since second quarter 1998 as demand for warehouse, distribution, R&D and flex space slackens, according to the latest numbers from the Orlando office of Grubb & Ellis Co. There is 9.7 million sf of vacant product available out of a total 12-market inventory of 94.6 million sf.

Sublease space alone totals 3.2 million sf, up from one million sf in July. Those numbers will affect near-future construction of both new build-to-suit and spec product, Murphy concedes.

“With Orlando’s current availability of industrial sublease space and negative net absorption year-to-date, developers have conceded that some deals, particularly involving smaller tenants who can easily be accommodate in second-generation space, may evaporate,” Murphy tells GlobeSt.com.

“But the bigger companies who are looking for large or specialized industrial space are active in the market and we expect to see several build-to-suit facilities land in Orlando in the coming months,” the broker says.

Murphy adds, “I do think the deals that get done in our market will be underwritten much more conservatively than in the past, with particular attention given to the tenant’s credit, length of term and adaptability of the facility to other industrial tenants.”