What is a Built-To-Suit Warehouse? Types and Benefits

Warehousing space in rising demand

“In case of a built-to-suit warehouse, the developer is assured of tenancy even before the construction and this gives him confidence and financial security.”

A built-to-suit warehouse is a type of warehouse wherein there is an agreement between the lessor (developer) and the lessee (client) and the warehouse space is customized according to the client’s requirements by the developer. The developer shares all the design and construction requirements at the outset, which when agreed upon, the actual warehouse construction commences. Customised design as per client’s needs is brought to life using resources and expertise of developers. This allows for the dynamism and flexibility that businesses require to handle contemporary logistical challenges and bottlenecks, with the advent of e-commerce logistics and booming warehousing market in India.

Built to Suit Development

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. In other instance, we have a built to suit agreement wherein occupier is committed to taking the space on lease and the box is customized as per his requirements. The tenant specifies its needs to the developer, then drawing is shared by the tenant and once agreed then the construction is started. The need for built-to-suit warehousing arises as the current lot is small, dilapidated and not in sync with the technology available.

In built-to-suit warehousing, 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 be it the 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.

The asset is developed as per the occupier’s requirements and specifications. While implementing a build-to-suit strategy, it becomes necessary to forecast long-term growth goals and needs. In such a development, there is a pre-leased agreement with the occupier. Costs saved therein can be invested in the core area of operation. In such developments there is no requirement of development expertise and the capital required is minimum.

The Modus Operandi

Occupier prepares the specifications for the development and the investor develops the property as per the occupier’s specifications. Occupier enters into a long-term lease on the property and the investor receives rental payments from the occupier. The lead up time taken by in this process is 9-12 months.

Benefits of BTS Development

The tenant can choose his desired location keeping in mind the support infrastructure in the catchment. Using a single developer to coordinate the land acquisition, design, construction, and 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. BTS projects enable companies to better match their distribution and warehousing needs with market demands.

The Convergence Of Cutting-Edge Technologies

A smart warehouse is one where all gadgets and devices are connected to each other via the Internet (Internet of Things). There is widespread use of automation and robotics in such facilities. Amazon is known for pioneering the smart warehouse model; therefore, this concept is at times referred to as the Amazon Effect.

The Size And The Cost

The average trending size for warehouse development in metros is increasing from 1-1.5 lakh sq ft to 3-5 lakh sq ft. In non-metro markets, it is between 50,000 sq ft and 75,000 sq ft. The ease with which it allows the option of flexibility and customization as per the business needs results into value for money. Compared to other assets the turnaround time here is fast (9-12 Months). Tenants are increasingly looking for expansion options within these parks. The development cost may vary from 1500 to 2200 per sq ft depending upon the specifications.

The Way Forward

Interestingly, while on one hand there are international developers and funds who 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. 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.

This article has been authored by Sandeep Chadha, Founder and CEO, Warehouster Capital Advisors and a proponent of Built-to-Suit Warehousing.

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