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ver the past decade, build-to-suit (BTS) commercial real estate has proven to companies that expansion or relocation requirements can be better filled by going beyond finding available market vacancies. Whether the company’s main consideration is to have its name on a cornerstone or to move into a commercial or office facility that’s individually tailored and has no renovation needs attached, BTS continues to prove a constant good investment — albeit in a slower economy.
Southwestern Bell and Invesco are examples of companies that have it all: a name on the cornerstone and a facility built to suit the companies, unique requirements and employee needs.
When San Antonio, Texas-based Southwestern Bell (SWB) decided to relocate and expand its Dallas support operation, the company had several compelling reasons to forego moving into existing office space and to choose to build a new complex. “We were looking for a particular real estate product close to downtown,” says Steve Sundby, SWB’s director of real estate. “We wanted a large floor plate with high parking and easy access to freeways.”
Easy access to accommodate employees and provide an easy commute were critical. “We were looking at providing a good work location at a real cost benefit,” says Sundby.
The answer was a BTS facility anchoring Pinnacle Park, minutes from downtown Dallas, with interstate access, highway frontage and a new building ready to move into in less than a year from conceptualization.
Southwestern Bell built its facility, designed and constructed by Beck Realty, a subsidiary of HC Beck Construction, in league with USAA, the Texas-based mutual insurance company. Also cooperating was the City of Dallas as it offered tax incentives to build on ground that had been undeveloped and lacked even infrastructure. “Considering this was a raw piece of ground with no infrastructure, no sewer, no sites, this was a pretty comprehensive project,” says Sundby.
The result is a four-story, 206,000-sq.-ft.(19,158-sq.-m.) complex that can accommodate 1,000 employees but currently houses about 500. Moreover, it’s just a 10-minute drive from downtown Dallas. It also has proven, he adds, to be a “very functional, very efficient layout with good access.”
The Pinnacle Park facility was completed about 25 percent faster than previous BTS projects for the communications giant. “The best aspect of the project, in addition to its size, design and flexibility, is the speed at which it was delivered. From start of construction to certificate of occupancy was only 283 days,” says Sundby.
The time line for the Southwestern Bell project isn’t usual, according to Gary Driggers of USAA, which developed the complex. The time varies due to a number of factors affecting the complexity of the project. “It could range from as short as nine months to as long as three years.”
For Colorado-based Invesco, the asset management subsidiary of United Kingdom-based AMVESCAP, the build-to-suit Denver headquarters project took two years before move-in day in November 2001. The company began 2002 not only in a new home, but also with its name on the new US$400 million home of the Denver Bronco’s, Invesco Field at Mile High. Both were worth the wait.
Ron Grooms, Invesco CFO, says that two years ago, “we could see our lease was going to expire (on our office facility.) It wasn’t meeting our needs; it was too small.”
The size crunch was starkly evident when planning for the new headquarters. It gave the company an expansion of about 100,000-sq.-ft. (9,300-sq.-m.), more meeting space for customers and brokers, a corporate caf? and a fitness center available to the company’s 800-member staff.
If Invesco had selected available space, says Grooms, there would have been compromises. With BTS, however, “we got exactly what we were looking for, what we envisioned.”
The site Invesco found, just 12 miles south of downtown Denver at the gateway to the Denver Tech Center, has inherent features not ordinarily found. Set on a campus of more than 14 acres (5.6 hectares), the headquarters offers one-of-a-kind panoramic views of distant mountains: Pike’s Peak in Colorado Springs and Long’s Peak in Boulder. Those views, Grooms stresses, can never be obscured.
The new Invesco campus features a six-story, 150,000-sq.-ft. (13,950-sq.-m.) facility and a second, four-story, 125,000-sq.-ft. (11,625-sq.-m.) facility. Expansion room was built in to accommodate a staff increase of as much as 25 percent. He added that there were no reconsiderations due to the September 11 attacks as Invesco already had in place sufficient security systems.
For those not used to the vagaries of the real estate, BTS could be a frustrating experience. Grooms says people might become frustrated with the requirements for zoning and dealing with government bodies. “From my perspective, I think there were no real issues,” he says, adding that the City of Denver worked alongside to ensure the project came about.
Hence, the success of the Invesco and Southwestern Bell facilities are the reason many companies, on both the industrial and office sides, prefer BTS to locating existing space and reconfiguring the property to suit individual requirements.
Additionally, says USAA’s Driggers, “a build-to-suit development allows a company to design a building to its needs instead of trying to match its needs to what’s available in the market.”
Companies taking advantage of BTS opportunities cross a variety of sectors and include projects such as Chase Manhattan’s complex in Tampa and distribution centers for Coors Brewing Co. and Volkswagen of North America.
For Chase, it’s a three-building, 450,000-sq.-ft. (41,850-sq.-m.) complex in Tampa’s Highland Oaks business park to be owned by Duke Realty Corp., its developer. The $113 million project will house Chase’s global Treasury Solutions Group.
Throughout the U.S., Duke is involved in the expansion of Lowe’s Companies, the North Carolina-based home improvement giant. Among the most recent projects are a $60 million, million-sq.-ft. (93,000-sq.-m.) distribution center in Wyoming. Says Lee Herring, senior vice president of distribution for Lowe’s, “The area’s excellent work force, proximity to major thoroughfares and other infrastructure assets make Cheyenne an ideal location to distribute to stores included in our westward expansion.”
For Coors Brewing Co., the global developer Colorado-based ProLogis is constructing a 221,050-sq.-ft. (20,558-sq.-m.) distribution facility in Denver to house a variety of Coors and other products supplied to retail and restaurant establishments in the Rocky Mountain area. When operational in spring 2002, Coors will hold sole ownership of the facility that will replace its current 80,000-sq.-ft. (7,440-sq.-m.) Denver facility.
Jack Rizzo, managing director of ProLogis’ North America group, says his firm was initially invited by Coors to review its existing facility. From that contact, it was determined that ProLogis would develop the BTS facility, from site selection, land due diligence, conceptualization to full design of the Coors-owned facility.
ProLogis had previously developed a 200,000-sq.-ft. (18,600-sq.-m.) distribution facility in Golden, Col., for Rocky Mountain Bottle Co., a joint venture operated by Owens-Brockway Glass Container and Coors.
Although some companies might prefer to lease the BTS facility, others, such as Coors, prefer to own the property, says Rizzo. He explains that depending on corporate culture and financial benefit, some companies choose to own a property while others prefer to lease it. The deciding factors are cost ratio corporate culture.
A lot of companies don’t want to tie up their capital in real estate. Says Rizzo. “Coors doesn’t mind inventory capitalization.”
One reason a company the size of Coors might choose to own rather that lease BTS properties, says Rizzo, is when speed is crucial, “it takes too long to go through corporate hoops. We completed the design in June, construction (began) in July and we’ll deliver in March.
ProLogis is active in another popular market: the Inland Empire. The company is constructing a 332,000-sq.-ft. (30,876-sq.-m.) distribution center for Volkswagen of America in Ontario, Calif. The facility will handle VW and Audi parts throughout the West Coast. According to Dale Hawke, VW of America’s parts leader, “location, size, timing and building image were key factors for selecting this facility. We knew that we wanted a state-of-the-art building in a high-image, master-planned park near the Ontario International Airport, and the ProLogis facility suited our needs.”
Fulfilling needs has meant working closely with clients, especially during market downturns. According to USAA’s Driggers, “even in a sluggish economy with abundant available space, it is still very difficult for a company to exactly match up their needs with the available supply of space. In addition to the company receiving the exact space they are looking for, many times they can obtain that new BTS space at comparable prices or even less than existing available space.”
As with many industries, softening economies have curbed some BTS expansions.
According to Rich Horn, CEO of Duke Realty, the BTS market is “slower than it has been (after) a significant peak in the ’90s. The downturn in the economy is affecting build-to-suit. People tend not to make long-term, 10 years and beyond, plans. And there’s more space available and a percentage of companies are expanding in the downturn.”
USAA’s Driggers says that many companies are hesitating making commitments for BTS facilities and the slowdown could continue for at least a year. But he also believes that different sectors have different needs. “I think BTS will keep driving, particularly industrial. There’s more efficiency; it actually is decreasing occupancy costs. And, to a small extent, that passes to the office sector.”
Gary Burk, executive vice president of Duke Realty Corp. and president of Duke’s construction group, believes the market is the lowest it has been in the last five to six years. In the early ’90s, says Burk, there was a great deal of overbuilding remaining from the ’80s. “Once property gets built, the overhang dried up.”
Although the BTS market may be soft, there is no tremendous build-up of industrial and office space available when the market turns around.
“The market is still active in many parts of the country,” adds Driggers. “In cities such as Denver, Houston and Austin, companies are taking advantage. The result has been reduction in occupancy costs, especially when based on long-term leases.”
A growing distribution center, says ProLogis’ is along the I-80 corridor in eastern Pennsylvania, due to the need for materials in areas of New York, New Jersey and Pennsylvania. Given the land constraints in the tri-state area, “there’s a lot of focus on that part of the country.”
There’s also more industry consideration of network distribution in light of a soft economy as transportation and labor costs escalate, outweighing the cost of real estate. About two years ago, says Rizzo, many major corporations began to optimize their distribution networks. “They put in place plans to save operating costs by coming up with new networks.” That has led to companies analyzing those networks and determining the most efficient, cost-effective method to distribute product.
There are cost factors between BTS and locating in existing facilities, says Driggers. “In general, there are some compelling reasons for picking a BTS instead of leasing existing space. They include lower interest rates more efficient construction methods and available land at reasonable prices.” Although USAA is a full real estate company working in major metropolitan areas, he adds, “we’ll go anywhere.”
— Elizabeth Sullivan is a free-lance writer based in Greensboro, N.C
