Understanding Build-to-Suit Leases: Pros & Cons
Build-to-suit (BTS) leases have become a cornerstone of the modern industrial real estate market. By allowing tenants to commission a custom facility designed specifically for their operational needs, this model diverts much of the development risk away from the tenant and onto the developer.
For developers, BTS projects offer a streamlined path to a "pre-leased" asset, effectively eliminating lease up risk. However, despite these distinct advantages, build-to-suit isn’t the right move for every business or every real estate portfolio.
In this guide, we’ll explore the pros and cons of this lease type, how it functions in practical terms, and what you need to know if you're pursuing a BTS project in the current market.
What is a Build-to-Suit Lease in Industrial Real Estate?
A Build-to-Suit (BTS) lease is an agreement where a business (the tenant) commissions a real estate developer to build a custom commercial property specifically for their use.
Custom Design: Unlike "speculative" (spec) buildings, which are built for a general type of user, BTS properties are tailored to a tenant's exact specifications—from floor load capacities and power requirements to specialized loading dock configurations.
Capital Allocation: The developer typically covers most or all of the construction and land acquisition costs, allowing the tenant to preserve their capital for business operations rather than real estate.
Long-Term Commitment: In exchange for a custom building, the tenant signs a long-term lease, typically lasting 10 to 20 years.
Why is Build-to-Suit Leasing On the Rise For Industrial Properties?
The industrial market is undergoing a significant shift. Nationally, we have moved away from the record-breaking pace of large-scale speculative development seen during the late COVID years.
According to recent NAIOP and CBRE data, speculative construction starts have declined significantly as developers wait for existing inventory to be absorbed. In this "tighter" environment, demand has turned toward tailor-made spaces. This shift helps:
Tenants: Secure modern Class A space in high-demand submarkets where existing inventory may be aging or functionally obsolete.
Developers: Avoid the "carry costs" of unoccupied properties. In 2024 and 2025, BTS projects have accounted for an increasing share of the development pipeline because they offer a guaranteed return from day one.
How Does a High BTS Market Change the Game for Leasing?
BTS leases differ fundamentally from traditional commercial leases. Because the landlord is incurring massive upfront costs to build a property that might be difficult to re-lease to a general user, the "game" changes for both parties:
For Tenants:
Higher Rent & Upfront Costs: BTS is often more expensive. You aren't just paying for space; you are paying for the developer’s financing and customization. Some agreements may also require an upfront deposit or "design fee."
Timeline Pressures: Once the lease is signed, the property still needs to be built. Tenants must plan their move 12–24 months in advance.
Commencement Terms: Rent payments typically commence when the building is "substantially complete." In some cases, this occurs several months before a tenant is fully moved in or has finished their own specialized interior build-out, although this–as with all things–is negotiable.
Less Flexibility: These leases are long and rigid. If your business model changes in five years, you are still committed to a property designed for your previous needs.
For Developers:
Concentrated Risk: Developers are on the hook for construction delays, rising material costs, and interest rate fluctuations without seeing a dime of rent until the project is finished.
The "Specialized Building" Trap: If a tenant opts not to renew after 15 years, the developer may be left with a highly specialized facility (e.g., a cold storage unit with unique plumbing) that is difficult or expensive to retrofit for a new tenant. This is in part why we see many newly delivered buildings sold to investors upon completion to remove risk.
Credit Sensitivity: Because of the investment required, developers and their lenders typically require tenants to have a near-flawless credit history to greenlight a BTS project.
Build-to-Suit Leasing in Minneapolis and St. Paul
In the Twin Cities, the industrial market remains incredibly resilient. At the same time, the national vacancy rate has ticked up, Minneapolis-St. Paul continues to maintain a lower-than-average vacancy rate (around 4.4% to 5.0% as of late 2025).
Should Tenants Consider "Build-Outs" or Major Renovations?
With Class A availability tightening in the Twin Cities, many businesses are looking at "second-generation" spaces—older Class B and C facilities.
The Trade-off: While a renovation (or "build-out") of an older facility in areas like Roseville or St. Louis Park might be faster than a new BTS project, it often comes with hidden costs. Older buildings in the MSP core often lack the 32’+ clear heights and modern fire suppression systems required for today’s high-velocity logistics.
What Role Do Submarkets and Outer-Ring Locations Play?
The search for space in the Twin Cities is moving outward.
Northwest Submarket (Dayton, Rogers, Otsego): This remains the "hotbed" for BTS activity. Large-scale projects for users like Daedex and Niagara Bottling have recently delivered here because land is available and accessible to I-94.
Southeast & Northeast: These areas are seeing positive absorption as tenants look for proximity to the airport and major shipping corridors. The Northeast submarket, in particular, has seen some of the lowest vacancy rates in the metro (as low as 3.3%), making BTS often the only way to secure a footprint there.
Beyond the Twin Cities: Accessible Industrial Inventory
If the Twin Cities market feels too crowded or expensive, many developers and tenants are looking at "tertiary" markets that offer more accessible inventory:
St. Cloud and Mankato: These regions offer lower land costs and more flexible zoning, making them attractive for manufacturing-heavy BTS projects that don't need to be in the immediate metro.
Hudson, WI: The eastern side of the metro continues to see spillover, particularly for companies that want to take advantage of Wisconsin’s business climate while staying within 30 minutes of St. Paul.
Whether you are a tenant needing a specialized hub or a developer looking for a secure investment, the Twin Cities' build-to-suit market offers a path to growth—provided you are ready for the long-term commitment.
Modern CRE is here to help you navigate the commercial real estate market. Reach out to us today to start a conversation!