Build-to-Suit Developments Booming

By Hylton, Richard | THE JOURNAL RECORD, June 14, 1990 | Go to article overview

Build-to-Suit Developments Booming


Hylton, Richard, THE JOURNAL RECORD


By Richard D. Hylton N.Y. Times News Service With the nation's financial institutions curtailing their real estate lending, the commercial building projects with the best chances - and in some cities the only chances - of getting financing these days are those that are made to order for a specific buyer or tenant.

These projects, known as build-to-suit developments, are experiencing a boom as the nation's developers, most of which build on speculation, try to compete in the custom market.

``The market in build-to-suits is getting really crowded because speculative development has dried up and companies with development staffs are competing for these opportunities,'' said Robert Williamson, the director of national marketing for the Prudential Property Co., a big national developer.

In build-to-suit projects, developers design and construct buildings to the needs of a primary tenant, which pays the developer a marginal fee for design and construction work and agrees to buy the completed building or occupy all or most of it in exchange for a favorable long-term lease.

The projects are easier for developers to finance than speculative buildings because rental incomes are guaranteed through a contract, allowing lenders to see clearly how their loans will be repaid.

``The banks will only come into a situation where debt coverage is clear and up front from the beginning, and right now that's in build-to-suits,'' said William Conway, managing director of Jones Lang Wootton, an international real estate concern based in New York.

But these projects are usually less profitable for developers than speculative developments. Custom builders must absorb any overruns themselves, because they are locked into fixed rental rates or selling prices before they complete a project.

By contrast, speculative builders can pass on all of their building expenses to their tenants, and they generally charge higher rental rates for taking on more risks, including the possibility that they will be left holding on to thousands of square feet of vacant office space.

As a result, many speculative builders are not well versed in the intricacies of build-to-suit pricing, leading to predictions that many will have trouble competing in the market.

Build-to-suit developments were pioneered by a few large developers in the 1970s for designing specialized industrial projects. But office space is increasingly being tailored this way.

The build-to-suit explosion has been going on in Texas for several years.

It took hold there after a drop in energy prices pushed the economies of Houston and Dallas into recession and devastated real estate values.

David Shulman, the director of real estate research at Salomon Brothers, said, ``It's been happening in Texas for a long while now and it's not surprising that it's now happening elsewhere in the country.''

Among the most recent custom-made buildings in Texas is the new $150 million office complex in Austin that Dallas-based Prentiss Properties is building for the International Business Machines Corp.

In that deal, NCNB Texas National Bank beat out another large domestic bank and two Japanese banks to provide construction financing.

Prentiss, which has generally limited itself to doing build-to-suit projects, prevailed over competition like the Trammell Crow Co. to build the 1.1-million-square-foot office space.

``We got the project because we had already established a real good relationship with IBM,'' said Michael Prentiss, president of the developer.

Prentiss had completed six other made-to-order buildings, valued at about $1 billion, for IBM.

``They had a tight time schedule and it's an important project, so they needed a partner that could deliver the product on time,'' Prentiss said. …

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