CRE Terms 15: Industrial Drill-Down
As part of our ongoing blog series detailing and unpacking core knowledge of commercial real estate (CRE) terminology, we’re back with new terms specific to new builds. So read on to double-check your understanding and working knowledge of these terms, and so you can speak to clients (and builders) with confidence.
For this edition of the blog series, we’re looking at infill, speculative builds, and functional obsolescence.
According to the NAIOP Terms and Definitions booklet – one of our go-to sources for this series – a speculative build is “developed and constructed without any preleasing in place”. They write: “Construction commences without a prelease when the developer believes there is so much demand for that type of building in that market or submarket that a lease commitment is bound to come through.”
It is key to note that “speculative” in this sense doesn’t mean merely hopeful or “chancing it”, although every developer’s own appetite for risk will guide them therein. Rather than acting out your own commercial property version of Field of Dreams (“if you build it, they will come”), speculative projects ought to be strategic endeavors, undertaken after a careful review of the market and its needs. Thankfully, your financing partners will likely insist on seeing that you’ve done your homework in this regard long before you break ground.
One strategy for planning a speculative build, is to look at infill options. This is defined, by NAIOP, as “the development of one or more buildings on underutilized land situated between existing buildings”. The reason we say it may make strategic sense to look at infill within the context of speculation is that you’re not pushing the peri-urban boundaries or looking to develop in untested territory, and can use the data from the existing market to inform what you chose to develop infill.
NAIOP continues: “Infill development is typically done in dense environments where land is scarce. The slightly broader term ‘land-recycling’ is sometimes used.” Although infill is acknowledged as expensive, some research suggests that it’s a far better option than the alternative, urban sprawl.
In densely developed spaces, infill development is often considered by local government to be “critical to accommodating growth and redesigning our cities to be environmentally and socially sustainable.”
It’s also important to understand when existing buildings may be best served by complete re-development. Building described as “functionally obsolete” is one that “cannot be improved to meet current market standards or tastes without a complete replacement of buildings systems and finishes”, reads the NAIOP doc.