What is a Built-to-Suit Warehouse

A company’s warehouse facility is one of the most important aspects of its operations, and keeping up with evolving operations poses challenges across all industries. Since built-to-suit (BTS) warehouses offer cost-efficient and state-of-the-art solutions to help improve operations, many businesses are turning to BTS warehousing as an alternative to building their own warehouses, renovating other facilities, or moving into existing warehouses.  

Different forms of built-to-suit warehousing

All forms of built-to-suit warehousing seek to improve warehouse space and help companies overcome warehousing inefficiencies. When choosing a warehouse management system, it’s important to understand that different forms of BTS warehousing vary by design, cost, and lease structure.

What is the design process for built-to-suit warehouses?

The design process for BTS warehouses depends on the tenant’s industry and needs. If the tenant requires few or no custom amenities, a basic design and execution can happen rather quickly.

Because each industry and company is unique, a tenant might need additional resources in its warehouse space. The following components affect the design timeline:

  • Office space requirements
  • Specialized racking configurations
  • Space for packaging, processing, light assembly and kitting
  • Docking space for shipping and receiving
  • Industry-specific amenities, such as cold storage facilities or hazmat areas
  • Automated warehouse solutions

What are the costs of built-to-suit warehouses?

Several factors affect the cost of BTS warehouses. Design elements not only affect the timeline, but they also dictate the cost of the project. Geographic location also affects the cost; some industries are best suited for urban areas, and others find less expensive real estate in rural areas.

Another main factor affecting the cost of BTS projects is the overall size of the warehouse. You can find an average square foot/meter cost for a basic warehouse management system design, and the cost will increase depending on what additional amenities the tenant needs and what the landlord is willing to include.

What are the lease structures of built-to-suit warehouses?

BTS warehousing is often used for commercial real estate leases. In general, the landlord agrees to build the facility according to the tenant’s requirements if the tenant is willing to sign an extended lease. The lease must be mutually beneficial to both the tenant and the landlord, so designing a lease that satisfies all parties may require some negotiation.

One of the main lease structures in commercial and industrial real estate is called a “gross lease.” Here, the tenant pays a large sum, and the landlord covers the costs of insurance, utilities, and maintenance. A gross lease is beneficial for tenants who prefer a fixed cost, so they can easily budget their facility expenses.

Another lease structure that you might come across is a “net lease.” This is more traditional than a gross lease because the tenant pays rent, property tax, utilities, and maintenance. Net leases are helpful for tenants who want to keep a close eye on each operating expense and receive savings that would be passed onto the landlord in a gross lease.

Advantages of built-to-suit warehousing

Customized BTS warehouses can be lucrative for both the landlord and the tenant. The property owner benefits from guaranteed rent and can reduce utility and maintenance costs by installing state-of-the-art equipment and amenities. Many tenants prefer BTS warehousing because they are provided with a facility that is built to their specifications.

Many companies are turning to BTS solutions because they are advantageous amid the increase of e-commerce and the reliance on the supply chain. Since BTS warehousing has become such a popular option, supply chain, real estate, and warehousing decision-makers must understand what is involved in building a warehouse and how to determine whether to use a developer. 

What is involved in creating a built-to-suit warehouse?

Building a BTS warehouse begins with creating a facility design and budget that appease both the landlord and the tenant. Since the warehouse will be custom designed for the lessee, you’ll have to consider components like automated warehouse equipment, office space, and an efficient warehouse management system. And because the landlord will likely still own the property once the lease ends, you should create a future-proof facility that other tenants can use without much modification.

What are the advantages of using a developer for a built-to-suit warehouse?

BTS warehouses allow tenants to rely on the expertise of the developer, who will find the perfect building for the tenant to conduct their business efficiently. Many tenants search for BTS warehousing to ease their long-term financial burden. An experienced developer who specializes in industrial real estate can find, construct, and customize the best property for the tenant at the best price.

Hiring a developer to design and build a BTS warehouse also benefits the property owners, who should be looking for developers with track records of on-time project delivery, solid construction, and strong maintenance and operations performance as landlords. Developers specialize in the best ways to construct or renovate a building—including the most current technology. They can create a state-of-the-art, and even future-proof, warehouse to earn rent for the landlords for years. Logistics park operators who build BTS warehouses already have title to the land inside their parks and have constructed or installed critical infrastructure – walls, roads, drainage, waste collection and recycling, security, power connections, water hookups, IT infrastructure, open-yard and laydown storage, vehicle maintenance and refueling areas, and more.

What makes built-to-suit warehousing a popular option?

BTS warehousing has become a popular option for many companies. Growing e-commerce businesses need significant warehouse space to accommodate their inventory—but many of these businesses don’t have the liquid capital to build a custom facility that suits their needs.

Building BTS warehousing is appealing to both national and local companies, typically larger, well capitalized businesses.

Leasing a custom-built facility helps tenants afford large warehouses, so they can improve their distribution center operations and serve more customers. The advantages BTS warehousing presents to both parties in a lease agreement make it an appealing, popular option to both tenant and landlord.

Challenges of built-to-suit warehousing

Like all business investments, investing in commercial real estate carries some risk. BTS warehousing is lucrative and beneficial for many tenants and landlords, but it does come with some challenges. Fortunately, it is possible to anticipate and overcome the obstacles you might encounter.

What are some red flags in the built-to-suit warehousing process?

One of the biggest threats to successful built-to-suit warehousing is miscommunication or misunderstanding between the landlord, or developer, and the tenant. The people doing the construction and designing the warehouse customization must understand the tenant’s industry and needs. If they’re not well-versed in topics like supply chain importance and warehouse operations, they risk building an inefficient facility.

When wouldn’t a built-to-suit warehouse be a good idea?

BTS warehousing is an excellent arrangement for many businesses, landlords, and developers; however, it’s not the best fit for everyone. Companies must consider their timelines, resources, and needs when determining whether BTS warehousing is a good idea.

When a company needs a warehouse space to house its inventory and run its operations immediately, BTS warehousing may not be the best option. Construction can take months or years, depending on the size and complexity of the project.

When warehouse managers can run operations smoothly in a less expensive building, companies might not require a customized building. This means that they likely won’t get custom amenities like an automated warehouse or state-of-the-art equipment, but they might not need these components.

Who wouldn’t be interested in a built-to-suit warehouse?

Not all types of businesses are interested in leasing a BTS warehouse. Start-up companies, small companies, or companies with little to no physical inventory are examples of businesses that might not be interested in a built-to-suit warehouse.

Because a BTS lease can be expensive and usually lasts at least ten years, start-up companies may not have the money or established credit to sign the lease.

Some small businesses do not need the space or customization of a BTS warehouse. If they’re working with an efficient warehouse management software in a facility that fits their needs and their inventory, they usually are better off in ready-built warehousing.

Even in the e-commerce and supply chain industries, not all companies keep a large on-site inventory. A small office space might suit these companies better than a BTS warehouse.

Typical timeline of built-to-suit development

Like every construction project, built-to-suit development involves a lot of moving parts. The project timeline begins with securing funding, usually through a construction loan, followed by the creation of a built-to-suit work letter, which includes decisions on location, construction materials, design, building logistics, funding, and construction timeline.

Delays are possible throughout a BTS project, but you can manage the process and each party’s expectations by identifying factors that might affect your timeline and your loan in the built-to-suit work letter, which should include not only challenges but potential solutions.

What are the components of a built-to-suit work letter?

Each BTS project includes a built-to-suit work letter. This document must be written and signed before any construction can begin because it outlines the work that the developer or landlord must complete, including:

  • Building location, particularly with new construction
  • Facility design, layout, and amenities
  • Construction costs
  • Specialized construction materials
  • Estimated construction timeline

The landlord, developer, and the prospective tenant must agree to the terms of the built-to-suit work letter before construction can begin. This sets appropriate expectations for all parties.

What factors can affect the timeline of built-to-suit development?

Commercial real estate development comes with surprises and challenges, and variables in each BTS project may impact the construction project timeline. The BTS work letter should include a worst-case scenario timeline and a backup plan in anticipation of potential challenges.

Before construction even begins, the developer must ensure that the geographic area is properly zoned for the tenant’s industry. Zoning change applications generally go through the local government entities, and processing can cause delays in construction.

After the zoning is confirmed, construction materials can pose another challenge. The developer must monitor any international supply chain problems that might delay in materials that can’t be locally sourced. Once the materials arrive, weather and labor availability can cause further delays.

What are the requirements for a built-to-suit warehouse construction loan?

For all commercial and personal loans, the lender needs to be assured that the loan will be fully repaid in a satisfactory amount of time. The loan must be secured before the parties sign the BTS work letter, and thus before construction begins. Although each lender’s terms vary, most lenders require some standard criteria:

  • Excellent credit. A bank typically won’t lend money to a business or developer with poor credit. A high credit score is the best way for the lender to rest assured that they’ll make money on the loan.
  • Developer credibility. If a lender has had success with a developer on previous projects and any prior loans are in good standing, it’s easier for the developer to get a new construction loan. A good relationship with the bank could also lead to a lower interest rate.  
  • Industry stability. The lending bank will likely perform some research to ensure that the tenant’s industry is growing—or at least stable. If the tenant’s industry is on the decline, the lender will have concerns about the loan being paid by the developer, landlord, or the tenant.

Rely on the experts for your built-to-suit warehouse project

Built-to-suit warehousing can greatly improve a tenant’s overall operations. Designing a warehouse as part of a BTS lease agreement should include cost-efficient and state-of-the-art office and warehouse equipment that benefit both the tenant and the landlord. Agility specializes in helping companies throughout industrial supply chains become smarter, faster, and more efficient. Visit our website to learn about our logistics parks, e-commerce logistics, and facilities management.