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Commercial Real Estate

CRE Opinion: A Better Approach to Build-to-Suits

By leveraging specialists and establishing a process where goals are aligned, all parties pull in the same direction—and everybody wins.

A friend recently ask me how long I’d been in the construction industry before I got to Cushman & Wakefield. The truth is, I had not worked in the construction industry at all. I had an undergraduate degree in business, not in architecture or engineering, an MBA, and had worked in telecommunications and IT consulting. What did I know about selecting architects, engineers, about permitting processes, negotiating TI allowances, or anything else for that matter? Not a lot.

Thankfully, that didn’t stop Cushman & Wakefield from bringing me aboard, because what I did have was an intense curiosity about the commercial real estate business and a nose for sniffing out problems and inefficiencies in complex processes. Most specifically, I was fascinated by the tasks required to take an abstract concept (a lease transaction or land purchase) into an operating work environment.

Randy Thompson of Cushman & Wakefield

I managed my first build-to-suit in 2005; a 400,000-square-foot industrial project in Wilmer. And boy, did I find a lot of problems. For starters, the developer ran the show, controlling the land, the architect, engineers, and contractors. By keeping such tight control, the developer prevented the client from fully understanding what was going on. After a couple of adult beverages loosened his tongue, the general contractor shared with me that the goal was to come in just enough over budget, so my client wouldn’t object and the developer could pad its fees.

Me: “That’s because the fee is based on a percentage of the overall spend?”

GC: “Yup.”

Me: “So if the project comes in at say, $25 million instead of $30 million, does the client get that $5 million back?”

GC: “Are you nuts? This is a turnkey deal.”

Me: “So you make more money if the project comes in over budget, and if it comes in under budget?”

GC: “Yup. Is that great or what?”

I suppose it’s great if you are the general contractor or the developer. But my client was neither.

Throughout the development process, I kept a close eye on the spending. I was sure things were coming in under budget in a lot of areas, but I never saw any savings accrue to my client. And when the building was finished, the developer had a Class A credit tenant (my client) in place on a long-term lease, which they used to flip the building for a nice profit. My client did not benefit from any of this.

This process revealed little upside for my client, but plenty of downside. And that just didn’t seem right. There had to be a better way.

Over the next two years I managed a 280,000-square-foot office build-to-suit and an 820,000-square-foot distribution center. The projects gave me the opportunity to roll out the first of my ideas to fix what I considered to be a broken system. That led to 10 years of experiments and experience, reworking the process from start to finish.

Why Specialization Matters

The concept has evolved into one of the latest Specialty Advisory Groups here at Cushman & Wakefield. Before I get into the details of what we’re doing, consider the results that can occur when specialists are involved:

  • Having specialists carry out services implies their work product is superior to generalists
  • Specialization reduces the risk of error, as a specialist is less likely to make a mistake
  • Specialization saves time and money, because if one keeps doing the same thing over and over, he or she develops efficiencies the novice does not know about

When something is rare, infrequent, or complex, it helps to have specialists focus on those activities. Such projects are by nature high-risk, and they require specialized tools and processes. Consider the U.S. Marine Corps, where thousands of dedicated, highly-skilled men and women are trained to act as one. They’re taught to follow orders and to rely on their chain of command.

Also consider the Deltas, a much smaller group that takes all they need with them. They’re taught to adapt on their own, to adjust to circumstances on the ground, and they’re given the authority to change tactics, if needed. Although both groups are specialized, Deltas are asked to handle the unusual, the rare events, not major encounters on traditional battlefields.

Just like the need to deploy Deltas is rare, so, too, are build-to-suits, and the data backs this up. Although such projects account for about 30 percent of office projects underway across the U.S., not once in the last six years have build-to-suits accounted for even 1 percent of the thousands of leases Cushman & Wakefield brokers transact on an annual basis.

Each build-to-suit project is unique and requires a level of triage skills to get them started properly. And because clients don’t normally have staff waiting around for the next build to suit, these projects represent ideal opportunities for specialists.

Pulling in the Same Direction

With these concepts in mind, we have used our experiences in this space to realign the goals of the developer and general contractor with those of our client, such that all now pull in the same direction. We promote a culture that promotes aggressive competition, one that caps our client’s upside risk at their decision-making point, and if costs go down, so does their lease payment. Then we share our savings with the general contractor and developer, and thus they make more money not if the project costs go up, but if they go down. And then we make sure our client benefits in the profit if the building is flipped. After all, a big part of the value is created by the client’s credit rating and lease term, right?

Some developers will see this process as a change to the old order, because that’s exactly what it is. However, it is possible to allay their concerns and help them realize this is a better business model for all. And by getting specialists in early, those who understand these concepts, we can help install, into the foundational documents, the levers needed for everyone to achieve success.

Randy Thompson is Senior Managing Director of U.S. Corporate Project Management for Cushman & Wakefield and Co-Leader of the firm’s North American Build-to-Suit Specialty Practice Group.

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