Nov-Dec, 2017 9logisticstechoutlook.comfoot+ speculative development as a "Big Bomber" and that sounded like a pretty good name for it!Building a 1millionsquarefoot+ distribution center requires approximately more than 60 acres of land and more than $50 million. Developers are paying a premium for viable sites or finding creative solutions to assemble these monster land sites including considering outlying markets and moving creeks out of the way.Factors to Consider when Building a Big BomberSpeculative (spec) development is on the rise to meet this demand. They are betting on the come. This is a much higher risk than a build-to-suit (BTS) project, but the payoff can be substantial. Building spec provides developers with a competitive edge due to the increased speed of delivery time. When building a spec bomber, developers take a hard look at the following to limit their risk:1) Historic Absorption ­ Developers analyze historical absorption numbers to gauge market viability when deciding whether or not to build spec.2) Current Competition ­Developers study market competition and try to lock down a land site in a location that gives them a competitive edge.3) Active Deals In The Market ­ Developers spend much of their time developing relationships with the end users, top real estate brokers, and economic development officials. Developers lean on these relationships to keep their pulse on the market and identify market activity and trends. 4) Design Trends ­ Developers keep up with current design trends by interviewing architects, key tenants, supply chain consultants, material handling consultants, industrial engineers, and real estate experts to ascertain the optimal layout before breaking ground on these $50 million+ high-risk investments. Spec developers walk a fine line when weighing the benefits of certain amenities while keeping a close eye on costs to keep economics competitive. 5) Labor Market ­ 1 million square feet of distribution space requires a lot of labor. Sophisticated tenants invest significant amounts of time and money analyzing labor trends and availability when selecting a facility. The labor market can be drastically different from one submarket to another. If Amazon moves next door, they will hire 1000+ workers and will typically pay more and provide better benefits than most distribution facilities. 6) Economic Incentives ­ Tenants and developers are taking a hard look at what incentives are available to determine where to build a 1 million square foot distribution center--which can potentially create over 1000 new jobs. While developers build these big bombers on a speculative basis, the build-to-suit model is increasingly popular option because BTS's typically provide the most competitive economics, while allowing tenants the ability to design unique facilities to meet their specific operational needs. Two challenges faced by BTS developers are competition and time. If a tenant entering the market has the time to pursue a BTS, they will have more options to consider than the tenant that needs an existing building right away. This factor, along with lower carrying costs creates a much more competitive environment for BTS developers and can result in extremely aggressive economics. A BTS can take anywhere from 9-18 months to deliver. When delivery speed of these buildings trumps cost savings and customization, this creates a window of opportunity for the speculative real estate developer to play ball.Not too long ago, a 1 million square foot facility was anything but an industrial developer's dream. Today, the explosive rise of e-commerce has made this fantasy a reality. Customers' demand for faster delivery speeds, for both B2B and B2C product is creating a growing need for these massive facilities. Ward Richmond
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