Unknowns Present Challenges To Build-To-Suits
April 27, 2016

As seen on GlobeSt.com

From the office user’s needs to the costs and sale price, build-to-suit developers must find ways to reduce uncertainty in order to satisfy all parties’ needs, Kelly Givens, executive managing director and member of the corporate-services group at Savills Studley, tells GlobeSt.com. The firm recently appointed Givens to its board of directors. We sat down with him for an exclusive chat about the challenges of build-to-suit projects—in particular, cost-containment measures.

GlobeSt.com: What are the greatest challenges, in your estimation, in build-to-suit projects?

Givens: I represent the user side of the equation exclusively. In corporate America, the use of accretive capital is not usually in a non-core part of the business. Real estate is not generally a place for corporate America to put its money, so there are usually lease structures. But with those come two different lenses: the tenant/user and the owner. The user wants a certain look, feel, culture and square footage, but the owner says, “What about the next 15 years beyond your lease?” There is life after the initial build-to-suit tenancy. You have two somewhat challenging viewpoints, but they start out as partners; ultimately, it’s a control issue.

One of the challenges if you haven’t yet created a building, how do you write a lease on it? How do you define the need and the quality and what you want and intend to build? Do we wait and define it later, or do we sign a lease and agree that the owner will build what the tenant wants? Defining what you need is first, and corporate America is changing a lot, so flexibility is important. Companies need to be able to add or shrink square footage. The challenges there are, do you have a stable workforce and a stable predictive envelope with which you are comfortable? High-growth companies are challenging and not great for a build-to-suit. They may need to be in multiple buildings, so if they need to shed or add space it’s easier.

GlobeSt.com: How can developers keep costs under control when developing these projects?

Givens: Depending on how you’re structuring the deals, costs are three to five years away, so how do you predict what those costs will be so far in advance? This is all about risk. The person delivering the building is taking on that risk. They need to shed the risk, but somewhere down the line, the best way to do that is by collaborating with contractors and architects much earlier in the process. The industry did a lot with design/build projects, and the accountability was there, but people didn’t really like that because there was a bit of a conflict: it was driven by cost, not quality. Then, design assist came in, where there was input, designing within a budget and later finding a contractor to build it, which did work. Most recently, people starting doing integrated delivery, which encouraged collaboration between the architect and the builder/contractor to share risk. That’s how many of us in the industry control cost—you don’t let the design team get too far out of the box before you tell them what you want to be designed and the cost. It’s a matter of bringing the contractors on much earlier in the process.

GlobeSt.com: What other cost-containment issues are of concern today?

Givens: Users and developers can go directly to some of the sub-trades, but part of that risk is, do you have the right contractor? Can he get enough resources in the marketplace? In San Francisco, you have a hard time competitively bidding projects with contractors because they’re so busy; in Houston, it’s a little different, and it’s the same with Atlanta. Different parts of the country have different pulses to them based on the amount of public-works projects. You have to treat build-to-suits a different way on shedding that risk. If you engage the contractors much earlier, like steel and glass, it mitigates time and cost. Lastly is finance: timing is very volatile in market-rate development. Interest rates are changing, so when do you want to set the pricing and financing—at the beginning or at the end?

GlobeSt.com: What else should our readers know about your appointment to Savills Studley’s board of directors?

Givens: It’s a brokerage company, for sure, and we’re all brokers on the board. I would think it sends a message about Savills Studley’s commitment to diverse skill sets in this industry. I come from a nontraditional brokerage background of architecture, construction and development, but I’m a broker, a transactional guy. My background is the built environment. I bring a different set of tools to the game. It sends a message that a high level of service for our clients is delivered through very deep and diverse skill sets, and that view on the board, at the executive level, is important.