The vivid rebound of Mexico’s export industries after the 2000-2003 slump is reshaping Mexico’s industrial real estate landscape in surprising ways.
Not only is a new class of real estate investors moving into Mexico, shifts in global manufacturing and supply chain patterns are opening new real estate markets and changing the ways manufacturers approach industrial production in Mexico.
The most profound trend is the new arrival of capital from Wall Street, pension funds, private investors and foreign governments that are gobbling up Mexican industrial space with expectations of high returns, according to CB Richard Ellis, a brokerage firm based in El Paso, Texas, and Ciudad Juarez, Mexico.
This type of investing performs an end run around Mexico’s traditionally weak domestic banking sector that never has been able to finance real estate development on a wide scale.
“In the major markets in the United States, such as Florida, the Inland Empire of California, or even Houston and Dallas, cap rates [yields] can reach as low as 6 percent,” said Mark White, managing director of CB Richard Ellis in El Paso/Juarez. “Those same buildings with the same tenants and essentially the same construction standards in a comparable first-tier Mexican border market have cap rates that range between 10.5 percent and 11.5 percent, so clearly you can see that the investor faces less competition and will enjoy a higher yields.”
Examples of institutions investing in Mexican industrial real estate are the California Public Employees’ Retirement System, investment funds from Germany and the Lion Fund operated by Dutch insurer ING, said Gary Swedback, president of NAIMexico, based in San Diego.
“These institutional investors are coming to Mexico because the yields are considered safe and stable,” he said. “They are dollar-denominated and next to the United States. Plus the projects are leased by global manufacturing firms, and that is appealing to the investors.”
Institutional investments in Mexico means tenants will find a larger pool of higher-quality buildings and more aggressive leasing options.
“In a market like Juarez, we will see companies occupying new institutional-quality facilities at comparable lease rates to those found in Mexico in the past,” White said. “We have already begun to see companies leasing new speculative buildings with lease rates on par with traditional landlords not connected to new capital market partners. Tenants will have better facility options without seeing an increase in overall facility costs.”
New Ways of Leasing
Disappearing is the old practice where Mexican developers relied on U.S. bank loans to provide lease discounts. That meant a tenant would sign a lease for a period of time and the bank would provide a loan to the developer for a present value amounts of the lease payments.
All lease payments then would be applied directly to debt service. Today, lenders are willing to stretch out the loan period beyond the five or seven years of an initial lease term, allowing developers to spread resources into multiple projects, which is typical in the United States.
| Driving this shift in freight routes is the congestion at the Pacific ports in Long Beach, Calif., Seattle and Vancouver, British Columbia. |
“You have a lot of buildings in Mexico that have very low basis in them because the tenant had to pay with cash for most of the tenant improvements at the beginning of the occupancy,” White said. “Now you have a situation where developers can receive full amortization or full financing of the total tenant improvement costs and that has made a number of developers more competitive and given them the ability to build more product.,
The Mexico border zone has become one of the strongest manufacturing centers in the world, especially in Juarez, Reynosa, Tijuana and Monterrey, said Christian Perez Giese, also from CB Richard Ellis.
That strength stems from proximity to the U.S.-Canada markets, a developed supplier base and skilled labor pools.
“Ciudad Juarez is the most active industrial real estate market in North America,” Perez Giese said. “Currently, an equivalent of almost 10 percent of the market is under construction. It is an amazing statistic for any market, especially when considering one that has experienced such a dramatic downturn from 2000 to 2003.”
NAI Mexico’s Swedback agrees that Juarez is booming. Several million square feet of industrial space abandoned when the electronics industry moved en masse to China has since been absorbed.
In fact, some of that absorption comes from Chinese companies themselves, setting up television and other production in Mexico to avoid new U.S. tariffs and quota limits, Swedback said.
Global Trends Impact Real Estate
The next wave of Chinese investments in Mexico is on the horizon, Swedback pointed out. Government/private company partnerships will move into Mexico with large industrial, housing and commercial projects, revolving initially around electronics, machine tools and home appliance production, Swedback said.
“This is part of the global trend of following trade flows,” he said.
To top all that off, Mexico is emerging as a new trade corridor for Asia-to-U.S. marketplace trade.
Driving this shift in freight routes is the congestion at the Pacific ports in Long Beach, Calif., Seattle and Vancouver, British Columbia.
“Cargo can sit there five to 10 days waiting to be processed for distribution,” Swedback said.
Mexico has an appealing answer — it’s own Pacific container ports led by the ones at Lázaro Cárdenas in the state of Michoacán and Manzanillo in the state of Colima.
Mexico’s government assisted in the formation of these alternative ports by changing its law to allow incoming U.S. and Mexico market-bound freight to travel from Lázaro Cárdenas by rail “in bond,” without duties or tariffs.
Kansas City Southern (KCS) Railroad has invested $2.5 billion — $1.4 billion to acquire Mexican rail routes and the rest in route improvements — to haul freight originating in Asia to San Luis Potosí, where the nation’s first U.S.-style foreign trade zone operates, offering further deferment of duties and tariffs.
KCS’ routes continue north across the border, all the way to Kansas City, offering one-railroad service from Mexico’s Pacific Coast to the U.S. heartland, shaving a week or more off shipments that pass through U.S. and Canadian Pacific ports.
The city of Kansas City has announced plans for Mexico’s customs agency to operate in Kansas City, positioning the city as a major U.S. distribution hub for Asian-made goods.
“Test shipments already are being made,” Swedback said.
What does this mean for Mexican industrial real estate? More industrial development in Mexico’s central Bajio region, which includes the states of San Luis Potosí, Aguascalientes, Guanajuato and Queretaro, especially as more foreign trade zones materialize.
“Operational decisions will be made in ways not considered now,” Swedback noted. “Mexico traditionally has been seen by foreign manufacturing as an offshore labor market. Now it will be viewed as a trade corridor in and out of North America. That means real estate will be developed in Mexico for supply chain reasons, not as a solution to manufacturing.”
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