01-05-2004 / To Each, Their Own: Build-To-Suit

Advantages The built-to-suit option is becoming more popular on the commercial real estate market for several obvious reasons. Evelina Ishmetov, head of the consulting department at GVA Sawyer, says that the cost of construction per sq. meter can be 1.5 to 2 times lower than the purchase of an existing building. "It should also be remembered that the developer takes responsibility for the organization of the entire project. The client simply monitors the process and makes the final decisions," says Ishmetova. In addition, when a company orders the construction of a building and subsequently becomes the owner of the newly created facility, the property can be used as collateral should the company turn to financial institutions for loans. It should also be mentioned that in addition to purely economic benefits, the build-to-suit option can help out in anoth-er area as well: companies are not always able to find real estate on the market that suits their needs. "All of the facilities on the market have their own configuration, occupants, peculiarities, etc., which can turn off companies looking for a building," says Maxim Zhulikov, senior expert of the commercial real estate department at Penny Lane Realty. "As a rule, companies that choose build-to-suit aim to kill two birds with one stone. Firstly, they create a facility for their own needs according to certain characteristics, technical and engineering characteristics, locations, requirements and so on. Secondly, during construction, the possibility for future expansion is incorporated into project plans." According to Tim Millard, head of the department of consulting services at Stiles & Riabokobylko in association with Cushman & Wakefield Healey & Baker, quite a few companies today need mixed-use facilities, which are very difficult to find on the open market. "Factories that produce certain types of products will not find either pure production or pure office space suitable. Some companies need showrooms, work area space for training and seminars as well as office space," says Tim Millard. "This sort of company is likely to build a facility for itself." Drawbacks The only drawback of build-to-suit facilities pointed out by specialists is the risk that they will not be in demand on the secondary market. "On the secondary market, it can take a longtime to sell a built-to-suit building, as it is not a simple task to find a buyer who is looking for a facility with exactly the same characteristics. There are several examples of this, for instance, the building of the bank Rossiisky Credit on Smolenskaya Square. Of course, not all build-to-suit facilities run into this problem. For example, the built-to-suit building at Gogolevsky 11 was successfully sold several years after its construction was completed. The owners While the build-to-suit option is considered economically advantageous, the number of companies that have built facilities for themselves is quite limited. For many companies, real estate does not play a major role in their businesses and they do not have the time to focus on commercial real estate. Many prefer to lease. Not every company has the resources to make this sort of investment. According to specialists, the build-to-suit option is most commonly used by domestic and foreign financial institutions whose stability and financial resources are unquestionable. Companies that deal in natural resource extraction also often use this option. "Usually, the build-to-suit option is for companies for which their image before clients and partners is of prime importance and that are not satisfied with what the market has to offer," says Evelina Ishmetova. According to Penny Lane Realty, Russian companies prefer the build-to-suit option more than foreign companies. "Many western companies are leery of investing in real estate in Russia, because it is still considered risky. These companies have strict orders from their headquarters that restrict them from purchasing real estate in Russia," says Maxim Zhulikov. "Once again, for western companies, the most important deciding factor is not the possibility to economize but rather the transparency of the deal and the corresponding documents." Construction technologies On the commercial real estate market, according to experts, there is a general perception that facilities built specifically for the use of the owner are of a higher quality, both in terms of construction and finishing. However thrifty a company may be, it will only choose the best for its own facility. Specialists at Penny Lane Realty, however, do not agree with this perception: "Some companies need to economize to the maximum and move into the new facility as soon as possible. Other companies create intelligent buildings with the goal of owning a facility that will sell well in 5 to 10 years," says Maxim Zhulikov. "The quality of the project depends not on whether it is being built for the market or for the owner but rather on the financial possibilities of the owner, on the goals and profile of the company and on a variety of other factors." Asa rule, built-to-suit facilities are built with the help of professional developers, who take responsibility for the search for a site, develop the concept for the building and carry out the project according to the requirements of the owner. To begin the process, the client together with a professional set to work developing clear specifications and requirements in terms of location, configuration, technical characteristics and floor plans. With this in mind, the professional then sets out in search of an appropriate site. According to Tim Millard, this is the most troublesome stage of the process for developers. "The best sites, more often than not, are allocated for the 'needs of the city', and the rest are offered for lease at inflated rates," says Millard. "Without good 'administrative resources', it is quite difficult to find a good site fora built-to-suit project and to obtain all the necessary permits." After a site is found, the developer creates a project budget that is then discussed and agreed upon with the client. The next step is securing approval for architectural plans. After the architectur-al and engineering issues have been addressed, construction can begin. The construction is carried out in accordance with the established budget and time-frame, and upon completion the facility is turned over to the owner. Cost and payback A built-to-suit facility can run between US$1200 to US$1800 per sq. meter. These figures include everything except the interior finishing. The standard fit out costs around US$200 per sq. meter. At the high end, when looking at professional interior design, fit out costs can reach US$400 - US$600 per sq. meter. Companies that choose the most expensive fit out options often do so in consideration of how such a fit out will improve the prospects of selling the building in the future. The outlook for build-to-suit At present, specialists agree that build-to- suit facilities remain quite rare in Moscow. There are a variety of reasons for this, including the following: the lack of administrative resources among devel opers, the lack of transparency on the market for construction sites, the lack of a market mechanism for site allocation, etc. "As soon as there is a possibility of carrying out open competitions for sites and developers are given the possibility of developing this market, rather than cater ing to the powers that be, the build-to-suit option will become much more wide spread," reports Maxim Zhulikov. "The more transparent the market becomes, the more companies will want to build for their own use."