Build-to-Suit vs Speculative Warehouses: An Investor Framework

Build-to-suit developments trade lower risk for lower return, delivering 6%–8% development yields on de-risked income. Speculative warehouses target 8%–10% development yields but carry leasing, timing and covenant risk. In 2026's supply-constrained European market, speculative starts have fallen sharply, tilting the risk-reward balance back toward well-located speculative product in Tier 1 sub-markets.

What is build-to-suit and what is speculative?

A build-to-suit (BTS) warehouse is developed against a signed pre-let with a named occupier, usually for 10–15 years on FRI or NNN terms. A speculative warehouse is built without a signed tenant, on the developer's conviction that demand will absorb the space on or shortly after completion.

Both routes exist because the underlying supply-demand imbalance in European logistics rewards new stock. What differs is when leasing risk crystallises and how the returns are shaped.

What returns should you expect?

• BTS development yield: 6.00% – 8.00% (yield on cost) on 10-year+ leases
• Speculative development yield: 8.00% – 10.00% target on speculative starts
• BTS profit on cost: typically 12%–18%
• Speculative profit on cost: typically 18%–28% if leased at ERV within 6 months of PC

Speculative development supply across Europe fell sharply in 2024, according to Prologis Research, which now sees the lowest under-construction pipeline in seven years — a meaningful support to residual rental growth and lease-up velocity for well-located speculative product.

When does build-to-suit make sense?

• Institutional capital targeting core-plus returns with predictable income
• Investors who prefer long-WAULT product for financing efficiency
• Markets where speculative land basis has moved ahead of ERV growth
• Cross-border investors without local leasing capability

When does speculative development make sense?

• Tier 1 sub-markets with sub-4% vacancy and multiple active occupier requirements
• Investors with local operating partners and letting relationships
• Capital that can tolerate 6–12 months of income void post-completion
• Situations where secured land basis is materially below current replacement cost

How TROV ESTATE frames the decision

For most cross-border investors we run BTS as the base case and speculative as opportunistic overlay. If you want the underlying market context, our note on European warehouse rental growth in 2026 sits underneath this decision, and the Grade A warehouse checklist defines the specification either route should hit.

Frequently asked questions

What is the difference between build-to-suit and speculative?

Build-to-suit is developed against a signed pre-let with a named tenant on a long lease. Speculative development is built without a tenant, based on the developer's view of demand. BTS is lower risk and lower return; speculative is higher risk and higher return.

What development yield do speculative warehouses target?

Speculative logistics developments typically target 8%–10% yield on cost in European Tier 1 markets, with profit on cost of 18%–28% if leased at market ERV within six months of practical completion.

Is build-to-suit safer than speculative?

Yes, materially. BTS de-risks leasing before construction starts and produces a long-lease income stream on completion. The trade-off is lower return and lower rental upside if market ERV moves ahead of the pre-let rent during construction.

Why has speculative development fallen in Europe?

Higher construction costs, tighter debt terms and cautious developer sentiment cut speculative starts by 30%–45% between 2023 and 2025. The reduced pipeline is now a tailwind for existing speculative product and forward-funded schemes in supply-constrained markets.