By Ward Richmond
THE TOP 6 FACTORS TO CONSIDER WHEN BUILDING A BIG BOMBER
Speculative (spec) real estate development occurs when a developer buys land and builds a structure without having a tenant in tow. They are betting on the come. This is a much higher risk than the Build-to-Suit (BTS) projects, but the payoff can be substantial. Building spec provides developers with a competitive edge due to the increased speed of delivery time.
When building a speculative 1 Mil SF distribution center, developers take a hard look at some items to limit their risk as much as possible. Here are a few key items considered by developers before building spec.
1. Historic Absorption – Developers analyze historical absorption numbers to gauge market viability when deciding whether or not to build spec. If you look at the last 36 months, we’ve had over 30 tenants each commit to 600K SF+ of distribution space in DFW – almost 1/3 of those are 1 Mil SF+. This is extremely strong activity, and I would be willing to bet that chances are pretty strong that these mega tenants are going to continue choosing DFW as a market to build modern bulk distribution facilities.
Here’s a list of a few of the 1 Mil SF+ tenants that call DFW home!
1. Amazon – 5 different 1 Million SF + facilities – Ft. Worth, TX & Coppell, TX
2. Ferarra Candy Company – 1.06 Mil SF – Grand Prairie, TX
3. Whirlpool – 1 Mil SF – Wilmer, TX
4. Kellogg, Co. – 1 Mil SF – Lewisville, TX
5. Proctor & Gamble – 1.4 Mil SF – Wilmer, TX
6. WalMart – 1,002,620 SF – Ft. Worth, TX
7. Excel, Inc./ Lego – 1.44 Mil SF – Ft. Worth, TX
8. NFI Industries/ Lowes – 1.128 Mil SF – Desoto, TX
9. The Container Store – 1.101 Mil SF – Coppell, TX
10. Kohler – 1.4 Mil SF – Lancaster, TX
11. UPS – 1.2 Mil SF – Arlington, TX
2. Current Competition – Currently, DFW only has one existing 1 Mil+ SF modern bulk distribution building available. It is located in South Dallas, developed by Port Logistics Realty and has 36’ clear height. Two more are already under construction. Trammell Crow is building one in north Fort Worth with 36′ clear height, and another is being developed by Hines in South Dallas, boasting 40’ clear height. Developers study this competition, and with one sitting out there and a couple more about to land, most developers are going to proceed with caution until these Big Bombers are leased up. That being said, if a developer can lock down a land site in a location that gives them a competitive edge, you might see more dirt begin to move. Note: Other developers have built or are building smaller buildings that are expandable to over 1 Million, but for the sake of this article, I am only focusing on actual existing and under construction buildings that are 1 Million SF and greater.
3. Active Deals In The Market – Developers spend a lot of their time developing relationships (no pun intended!) with the end users, top real estate brokers as well as economic development officials. Developers lean on these relationships to keep their pulse on the market and identify market activity and trends. This information is kept close to the vest by these real estate professionals. Many of these large projects go by code names to conceal the identity of the well-known company circling the Metroplex looking to build a Big Bomber.
4. Design Trends – Developers keep up with current design trends by interviewing architects, key tenants, supply chain consultants, material handling consultants, industrial engineers, and real estate experts (among others) to carefully examine the optimal layout before breaking ground on these $50+ Million high-risk investments. Speculative developers are forced to walk a fine line when attempting to weigh the benefits of offering as many amenities as possible while keeping a close eye on the cost to keep economics competitive.
5. Labor Market – 1 Million SF of distribution space requires a lot of labor to support it. Sophisticated tenants are investing significant amounts of time and money analyzing labor availability and trends when selecting a facility. In large markets like DFW, the labor market can be drastically different from one submarket to another. Across the US, the labor market is tight. If Amazon moves next door, they are looking to hire 1000+ workers and will typically pay more and provide better benefits than most distribution facilities are used to paying. The smart developers are also investing in labor analytics to understand this component better as it relates to potential development sites.
6. Economic Incentives – Tenants and developers are taking a hard look at what location incentives may be available when determining where they are going to build a 1 Mil SF + distribution center – which can potentially create over 1000 new jobs. Depending on which municipality (City, County, State) you may be dealing with, economic incentives provided by the government can vary. UPS was recently awarded an incentives package in conjunction with their 2017 deal inked with Exeter Property Group for 1.2 Mil SF in Arlington, TX. The City of Arlington approved an incentives package which will include an 85% rebate on business personal property taxes which is estimated to net “Big Brown” $71,600 per year in savings. Developers and tenants alike analyze how business-friendly certain municipalities are when considering land sites for a Big Bomber to create the most competitive economics possible and maximize value.
While many developers build these big bombers on a speculative basis, the Build To Suit model is increasingly popular option because BTS’s typically provide the most competitive economics, while allowing tenants the ability to design unique facilities to meet their specific operational needs. The BTS process occurs when a tenant partners with a selected developer or contractor to build a customized facility. BTS developments are highly competitive and typically the lowest risk and lowest cost approach to developing these mega distribution facilities.
Two challenges faced by BTS developers are competition and time. BTS competition is fierce. If a tenant coming into the market has the time to pursue a BTS, they will have a lot more options to consider versus the tenant that needs an existing building right away. This factor, along with lower carrying costs (cost to carry land versus and entire building) creates a much more competitive environment for BTS developers and can result in extremely aggressive economics.
Regarding time, a BTS can typically take anywhere from 9-18 months to deliver depending on the scope of work. Thanks to the “need it now” culture we are living in (brought on by the “Amazon Effect”!) sometimes the delivery speed of these buildings trumps cost savings and customization, and this phenomenon creates a window of opportunity for the speculative real estate developer to play ball.
Building spec is a risky business but your level of understanding these six factors will undoubtedly help to give you an edge on the competition, and you just might be able to land the next Big Bomber! In my next post, I will dig into the key design elements considered by developers when building spec.
Ward Richmond is a Executive Vice President. Based in Dallas, Ward and his team work closely with tenants and developers around the globe to develop and execute world-class real estate strategies and site-selection services such as supply chain consulting, labor analytics, build-to-suit project management, and economic incentive negotiation services.