In 35 years of watching ground-up deals go up around Worcester County, the ones that worry me are the speculative ones. You pour the slab and hope somebody signs a lease before the interest carry eats you alive. Build-to-suit takes that gamble off the table. The tenant is committed before I break ground, so the lease-up risk everybody frets over just isn't there. CBRE puts BTS margins at 12-18% with immediate stabilization, against 18-36 months of lease-up uncertainty on a spec building.
BTS projects usually run 12-18% development margins and stabilize the day the tenant moves in, which is a better risk-adjusted number than a spec deal even though the headline margin looks smaller.
BTS tenants commonly sign 10-20 year initial terms, so you're holding long-term income instead of chasing vacancy.
A committed tenant and a clean approval path can knock 50-100 basis points off your financing cost, because the lender sees less risk.
Credit-tenant BTS properties tend to trade at cap rates 50-100 basis points tighter than a comparable multi-tenant building when you sell.
Build-to-suit (BTS) development is a commercial real estate strategy where a building is custom-built for a pre-committed tenant, eliminating speculative lease-up risk by securing occupancy before construction begins.
Development margin runs 12-18% for BTS versus 20-30% for speculative, but with zero lease-up risk (CBRE).
BTS tenants typically sign 10-20 year initial terms, which gives you long-term income security (Cushman & Wakefield).
As-of-right approvals and a pre-committed tenant cut financing costs by 50-100 bps (Mortgage Bankers Association).
Credit-tenant BTS properties sell at cap rates 50-100 bps tighter than comparable multi-tenant assets (CoStar Group).
Why build-to-suit?
Build-to-suit means you construct a building for a tenant who's already committed. That's the best risk-return setup I know of in ground-up development. You've got the tenant before you break ground, so the speculative lease-up period disappears.
The risk-return comparison
| Development Type | Lease-Up Risk | Development Margin | Time to Stabilization |
|---|---|---|---|
| Speculative | High | 20-30% | 18-36 months |
| Build-to-Suit | None | 12-18% | Immediate |
| Value-Add Reno | Medium | 15-22% | 12-24 months |
The BTS margin is lower on paper, but once you account for potential vacancy, lease-up costs, and timeline slippage on a spec deal, the risk-adjusted return usually comes out ahead.
Who pursues build-to-suit?
The tenants who come to me for BTS space are usually growing companies that need custom space, national retailers moving into a new market, medical groups that need specialized facilities, industrial users with specific operational demands, or corporate users pulling several facilities into one.
On the development side, you see merchant developers who build to sell, investor-developers who hold long-term, owner-operators building for their own use, and institutional shops adding to a portfolio.
The BTS process, step by step
Phase 1: tenant identification and requirements
Finding the opportunities comes down to relationships. Broker networks and tenant-rep contacts, direct outreach to companies you know are expanding, connections at the economic development agencies, and keeping an eye on RFPs both public and private.
Once you've got a live prospect, pin down exactly what they need.
| Requirement | Details to Capture |
|---|---|
| Size | Minimum, maximum, optimal SF |
| Clear height | Minimum required heights |
| Location | Geographic parameters, access needs |
| Timeline | Required occupancy date |
| Budget | Maximum rent or purchase price |
| Specifications | Loading, power, HVAC, specialty |
| Term | Minimum lease length |
Phase 2: site selection
For every candidate site, I want to understand the zoning and entitlement path, the environmental constraints, whether the utilities are there and have capacity, the access and traffic patterns, the geotechnical conditions, the grading and topography, the wetlands and stormwater picture, and the acquisition timeline and terms.
Then there's how you tie up the land.
| Method | Pros | Cons |
|---|---|---|
| Purchase agreement | Certainty | Capital at risk |
| Option | Lower risk | Option payment cost |
| Letter of intent | Flexibility | Less security |
| Ground lease | No land cost | Leasehold complexity |
My read: tie the site up under option with a 90-180 day due diligence window, and structure the option payment so it credits toward the purchase price.
Phase 3: pre-development
This is where you do the homework before you're in too deep.
On the environmental side: Phase I ESA, Phase II if it's warranted, wetlands delineation, a rare-species check, and NEPA review if it applies.
On engineering: geotechnical investigation, a boundary and topographic survey, utility capacity letters, a traffic impact study, and a stormwater management plan.
On legal and title: a title search and commitment, a zoning verification letter, existing easements and restrictions, and identifying any variances you'll need.
On architecture and design: a preliminary site plan, building footprint and massing, a code review against the IBC and accessibility requirements, and a preliminary cost estimate.
Phase 4: lease negotiation
The rent structure can be cost-based or market-based, with escalations either annual at 2-3% or tied to CPI. Industrial deals are typically NNN rather than gross.
On term, you're usually looking at a 10-20 year initial term with two or three five-year renewal options. Rent during those renewals is either a fixed step-up or fair market value.
The development provisions matter here. Spell out the construction timeline and milestones, the change order process, the punch list and acceptance procedure, and the warranty terms.
Get clear on tenant obligations too: who handles maintenance, how alterations and improvements are treated, environmental compliance, and the rules on assignment and subletting.
And lock down security. That can be a letter of credit, a security deposit, a personal or corporate guarantee, or a parent company guarantee.
Phase 5: financing
Here's how a BTS capital stack usually comes together.
| Source | Percentage | Terms |
|---|---|---|
| Construction loan | 65-70% LTC | SOFR + 275-350 bps |
| Developer equity | 30-35% | 15-20% target IRR |
To get the construction loan, the lender will want an executed lease with a credit tenant, a fully entitled site, a fixed-price or GMP construction contract, a completion guaranty from the developer, and an interest reserve plus contingency.
There's also a mini-perm option: a 3-5 year term after construction, interest-only during any lease-up, with the takeout typically happening at stabilization.
Phase 6: construction
Before you start turning dirt, get the final permits in hand, schedule the utility connections, mobilize the contractor, and order your long-lead materials.
Once you're building, keep the cadence tight.
| Activity | Frequency |
|---|---|
| Owner/Tenant/GC meetings | Weekly |
| Draw and budget review | Monthly |
| Quality inspections | Per milestone |
| Schedule updates | Bi-weekly |
Don't lose the tenant in the shuffle either. Keep them updated on progress, coordinate their fixtures and equipment, get the IT and security infrastructure lined up, and schedule the move-in.
Phase 7: delivery and stabilization
Substantial completion means you've got the Certificate of Occupancy, you've walked the tenant through acceptance, you've developed the punch list, and rent commences.
After delivery, there's still work: managing the warranty, finishing the punch list, collecting final lien releases, and getting the cost certification done.
Financial analysis
Development pro forma example
Take a 100,000 SF industrial BTS for a credit-rated logistics company on a 15-year initial term. Here's how the costs stack up.
| Category | Amount | Per SF |
|---|---|---|
| Land | $2,000,000 | $20 |
| Hard Costs | $9,500,000 | $95 |
| Soft Costs | $1,500,000 | $15 |
| Financing Costs | $750,000 | $7.50 |
| Contingency | $500,000 | $5 |
| Total Development Cost | $14,250,000 | $142.50 |
And the income side.
| Item | Amount |
|---|---|
| Rent | $10.50/SF NNN |
| Annual NOI | $1,050,000 |
| Development Yield | 7.37% |
| Market Cap Rate | 6.25% |
| Stabilized Value | $16,800,000 |
| Development Margin | 17.9% |
Sensitivity analysis
Here's how the margin moves when the key variables move.
| Variable | Change | Margin Impact |
|---|---|---|
| Construction cost | +10% | -6.7% |
| Rent | +$0.50/SF | +5.6% |
| Exit cap rate | +25 bps | -4.2% |
| Construction timeline | +6 months | -2.1% |
Common pitfalls
What goes wrong
The first killer is underestimating costs. Construction runs over budget, and the fix is a conservative contingency of 10% or more plus locking in a GMP contract early.
Second is tenant financial distress. If the tenant's credit deteriorates while you're building, you've got a problem. Do thorough due diligence up front and build lease security provisions in.
Third is entitlement delays. Permitting always takes longer than the optimistic version in your pro forma. Use realistic timelines and get in front of the agencies early.
Fourth is scope creep. The tenant keeps changing things and the costs climb without a matching rent bump. Set a clear change order process with cost pass-through provisions.
Fifth is construction delays from weather, labor, or materials. Carry schedule contingency, procure early, and hire a GC who's actually done this before.
Exit strategies
Options at stabilization
The cleanest exit is a sale to an investor. You sell to an institutional buyer looking for stabilized income, and a credit tenant on a long term commands premium pricing. Figure 6-12 months post-delivery.
You can also hold long-term. Keep it for the cash flow and appreciation, refinance the construction loan into permanent debt, and pull equity out through that refinance.
A third route is portfolio aggregation. Combine several BTS assets and sell them as a portfolio at a premium, which brings in the larger institutional buyers.
And there's the 1031 exchange, where you defer the capital gains and roll into a larger or different asset. That one takes advance planning.
At Lornell Real Estate we advise on build-to-suit deals across Central Massachusetts. Whether you're a tenant who needs custom space or a developer chasing a BTS project, call us and let's talk through what you're trying to do.
Limitations: Development timelines, construction costs, and regulatory requirements cited represent typical ranges and vary significantly by municipality, site conditions, environmental factors, and project scope. Permitting timelines depend on local planning boards and zoning requirements that change independently. Tax credit programs have specific eligibility criteria and application deadlines. This article does not constitute development or legal advice. Engage qualified architects, engineers, attorneys, and environmental professionals for project-specific guidance.
Sources & References
- CBRE
- CoStar
- CoStar Group
- Cushman & Wakefield
- Mortgage Bankers Association
This article cites data from the sources listed above. For the most current figures, consult the original publications directly.
Data current as of publication date. Market conditions, rates, and regulations may have changed. Consult a qualified commercial real estate professional before making investment decisions.
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