For any built-to-suit warehouse, the companies must take a longer-term view and ensure meticulous planning before embarking on any investments, as one will have to live with the consequences if not planned well.
A built-to-suit (BTS) warehouse or property is a facility designed and constructed for dedicated users to accommodate their business. Build-to-suit properties are especially popular among entrepreneurs whose demands concerning warehouse space are specific, or production companies who are not willing to engage their working capital in order to be able to quit the market quickly and cheaply, if they need to.
In contrast to available speculative space, BTS properties are very flexible in terms of:
- Location– Facilities can be developed within the developer’s land or the client’s real estate. The most advanced formula of BTS are projects executed based on the purchase of land, which is accepted by the client in terms of conducting business activity.
- Size of industrial space– Depends on the client’s operating needs;
- Type of cooperation– The possibilities are either to lease or construct in order to sell the investment to a client;
- Purpose of industrial facility– Warehouse-sorting plant, light production, heavy production, which takes place on the real estate that is to be the object of the investment.
Advantages of BTS solutions
The possibility of choosing appropriate location is a huge advantage for the tenant and often it is the key argument for choosing BTS.
“The greatest advantage of build-to-suit solutions is the free choice of location. BTS allows for freedom in respect of location. The properties are most often developed in the location chosen by the tenant, means that the developer buys a new plot,” says Joanna Choromańska, Senior Business Development- BTS Manager at JLL Poland.
“However, if the location preferred by the tenant is not covered by the developer’s land portfolio and is not one of the locations preferred by the developers, the lease term for such a construction will be at least 10 years and the surface area of the building will have to exceed 10,000 sq mt. This is because in locations where the demand for warehouse and industrial space is not high, the construction must bring profit to the developer during the tenant’s lease term. Thus, rent rates tend to be quite high in locations which are not very popular among developers,” Choromańska adds.
Businesses have three options when it comes to expanding into a new facility– they can invest in land and then can construct on their own, lease or purchase an existing facility and make necessary renovations, or partner with a developer to design and build a new facility for lease. “New developments can be speculative wherein the developer first constructs with standard features and then give it on lease. This type of development may have tenancy issues later on,” says Sandeep Chadha, Founder and CEO, Warehouster Capital Advisors.
However, in the case of BTS model, according to Chadha, the developer is assured of tenancy even before the construction and this gives him confidence and financial security. Also, since the requirements of the tenants may vary in terms of size or height, a BTS comes in handy in such situations. Across the warehousing industry, we are seeing a consolidation wave wherein the average space taken up has been increased substantially.
Although it depends on the operating needs of the customer, BTS properties are mostly intended for production. It enables companies to better match their distribution and warehousing needs with market demands.
“BTS allows for efficient management of storage space in order to take advantage of its potential, optimisation of the production and storage processes and effective utilisation of all the solutions installed in the warehouse,” Choromańska says.
At present, businesses do not want to engage capital in buying a plot and constructing a building, and decides to utilise BTS in order to economise on the investment and future maintenance costs. That is because it is cheaper to maintain BTS properties with solutions that are adapted to the customers’ needs and the nature of their industry.
“A single developer coordinating the processes of land acquisition, design, construction as well as funding eases off the everyday operational issues. Companies can reduce up-front costs by agreeing to lease rates at 30 to 40% of design, saving time and money, and expediting the project¹s time frame,” explains Chadha.
The operating structure
The tenant prepares the specifications for the development and the investor develops the property as per the tenant’s specifications. The tenant then enters into a long-term lease on the property and the investor receives rental payments from the occupier. “The lead-up time taken in this process is 9-12 months,” Chadha says.
Another thing worth mentioning is the time horizon of building a BTS. Choromańska says, “If the developer does not own the land intended for the investment, the period of development might go up to 24 months, depending on its size and the technical and legal status of the plot. In the case of building a BTS in an existing logistics park (where the developer has, for example, already obtained the building permit) the building can be commissioned within 6 months.”
BTS and 3PLs
Increasingly, many third-party logistics (3PL) companies across the world, and now in South East Asia are embracing BTS solutions to leverage the capital, resources, and expertise of commercial real estate developers, while dictating the design, construction, and management of new facilities themselves.
Today, 3PL operators are constantly looking out for space. Not just any space but one that would feed and fuel their growth strategies both short and long term. They vary accordingly from consolidation, bidding on a new RFP, expansion, and most importantly, matching up to technological advancement and state-of-the-art facilities. Many 3PLs also seem to be targeting and keeping abreast in complying with Green Index as one of the value proposition to their clienteles.
“The need to reduce CO2 emissions means that more and more organisations would prefer green solutions to lighting and power. This will create unique needs like solar panels for power generation, further mandating a BTS warehouse model. Finally, the product confidentiality and safety controls will be the uppermost on the minds of larger MNCs, necessitating the need for a separate warehouse infrastructure and not a common pool warehouse,” says Raviraj Rodrigues, Director of Supply Chain at Alstom.
Many 3PL players today work with real estate developers with their own land and bankroll the development and construction of the new facility per its requirements. The company will lease the facility, when completed, from the developer for a pre-determined period, while assuming all operational and maintenance costs and taxes.
In so doing, the company divests itself of land acquisition and development responsibilities while allocating time, resources, and capital to growing its business through mergers and acquisitions.
The e-commerce effect
A vast majority of brick-and-mortar retailers have either gone or are about to go online. Direct product delivery to the end-consumer requires a different approach and more advanced logistics technologies compared to deliveries to large-scale stores. Amazon and Flipkart are the precursors of this trend in India, where e-commerce is growing at a rapid pace, having a huge impact on the industrial and warehouse market. This has resulted in new types of developments, including distribution centres, cross-docks and small urban warehouses for last-mile delivery.
“The large e-commerce companies saw efficiencies in managing the warehouses using technology. They came in with a clear plan for large and energy efficient warehouses, with clear height 10-12 meters at eaves. They saw this as the only way to optimise the fixed cost efficiently. Also, the fire safety requirements for such large warehouses were way higher than normal warehouses and called for Advanced Sprinkler Systems complying with NFPA13 guidelines. This has created a demand for BTS warehouses across India,” informs Rodrigues.
While there will be some standardisation for Grade A structures, Rodrigues says it will still take time before we have uniform specifications for warehouse construction.
Convergence of technologies
There is widespread use of automation and robotics in modern-day warehouse facilities. In many BTS warehouses, automated or semi-automated racking systems and robots are deployed for product storage and picking with a key motive of fulfiling individual client requirements.
These facilities are the need of the hour especially when we are living in a transformational phase of supply chains blurring the needs of retailers. It can be observed that today there is a rising interest for BTS warehouses among companies that want their facilities to be completely customised as per global specifications, including warehouses with refrigeration rooms, automation, etc.
“The extent of economic efficiencies demanded by present-day businesses coupled with increasing customer expectations on the delivery speed (mainly influenced by e-commerce), have made warehousing operations extremely important for organisations. Companies are often looking at automation to cope with these circumstances. However, most of the standard warehousing infrastructures available in the market today, across cities, do not meet some of these specific requirements. So, companies are going for BTS warehouses in selected locations, of a particular size and infrastructure to meet their business needs,” says Rajan Ekambaram, Partner at Bengaluru-based Qwixpert Consulting.
The way forward
Demand for BTS warehouses is undoubtedly on a rise, owing to the full-fledged smooth customer experience that these facilities provide. They also offer the benefit of expediting the project’s time frame, and reduce the efforts as well. As such, players are anticipating a boom in BTS projects as it complies with needs of the developers and occupiers along with the market demands.
According to JLL, built-to-suit solutions accounted for almost 40% of the warehousing absorption in India in 2019.
“We anticipate that warehouse leasing is expected to rise going forward. This will largely be fuelled by an anticipated rise in product sizes, continued demand from e-tailers, policy impetus to both sectors and higher demand from tier II cities,” says Jasmine Singh, National Head– Industrial & Logistics Services and Senior Executive Director– Advisory & Transactions Services, CBRE South Asia.
As the sector evolves, Singh believes, developers will move beyond meeting the demand and supply, and focus on understanding the occupier’s needs, thereby offering modernisation of supply chains, optimisation of delivery networks and greater synergy between retail and logistics networks. “With models such as BTS, occupiers can specify the details in line with their needs, thereby allowing developers to implement their requirements on the back of financial security,” Singh says.
“More e-commerce players wanting to own and operate their own facilities will give rise to more built-to-suit facilities, thereby taking off some “pure” leasing from the market,” Singh further adds.
Interestingly, while on one hand there are international developers and funds that are entering the Indian markets, on the other, there are national and regional domestic players in the country who are now evaluating the market potential. Some key developers, including Allcargo Logistics, Ascendas, Embassy, ESR, IndoSpace and Logos India, are likely to command nearly 100 million sq ft of Grade-A space in the next four to five years.
Chadha says, “In this light, built-to-suit warehousing is expected to take the centre stage as companies want to focus on the core of the business and are open to outsourcing the ancillary functions. It’s a win-win situation for the incumbents involved as it removes the inefficiency and bottlenecks and helps in increasing the overall throughput.”
Meanwhile, Ekambaram says, although there is not any massive requirement for BTS warehouses in India, there is undoubtedly an uptick, and it is bound to increase as the sector and the overall economy improves.