2002 Mid-Year Update

2002 Mid-Year Update
Tijuana Industrial Real Estate Market

The big story is that there are more high quality, large (>100,000 SF) buildings available in the market than ever before. The market in general has a vacancy factor of over 8% today. Most of the smaller buildings available are still “C” grade or below, but once the size gets over 50,000 SF then the average quality of the buildings rises appreciably. Lower quality buildings are now renting for lower than $0.30/SF while higher quality buildings are still $0.35- $0.45 per SF. Construction prices remain in the $25/ SF range for shell buildings with 10% offices. Land prices are ranging from $4 – $8 /Square Foot, averaging $6/SF for finished industrial lots in Tijuana.

Definitions: “A” grade are modern, tilt-up construction with 50% or less land coverage ratios, high ceilings (24 ft.) and security. “B” grade buildings are often 5 years old, second generation facilities with up to 60% land coverage. “C” grade buildings usually have lower ceilings (16-18 ft.), block construction with more than 10 years of age and difficult truck maneuvering space or parking. “D” grade buildings are generally “0 lot line” 15+ years old and have difficult truck access. “F” grade buildings are functionally obsolete or dangerous, have little parking and/or inadequate zoning.

Major deals completed this year include:

* Sanyo sold 25 acres of prime Mesa de Otay industrial land to Prologis in an unusual barter deal.
* Sanyo also leased their Pacifico facilities totaling over 220,000 SF to Robinson and Robinson, which is building 150,000 SF of expansions on the site.
* Smiths Medical leased the 160,000 SF SAFT facilities in Tijuana Industrial Park.
* Douglas Furniture occupied a 50,000 SF built-to-suit by Grupo Carrillo in Otay.
* Lutteroth has finished a 90,000 SF spec building in Otay.
* International Golf dis-occupied 189,000 SF of space in Valle del Sur Industrial Park.
* Verbatim leased 70,000 SF in El Lago.
* Sohnen dis-occupied 60,000 SF in Pacifico.
* Robinson and Robinson is subleasing 100,000 SF in Pacifico. (Click here for further information.)
* Border Trade Services dis-occupied 59,000 SF in Nordika and 80,000 SF in Los Pinos.
* Morfin is disposing of 2 buildings of 135,000 SF and 44,000 SF in Otay.

Economics:

It now cost more to eat tacos at El Guero on Revolucion than at In-and-Out Burgers. Gasoline in Tijuana costs more than $3.00 a Gallon. Maquilas are defecting or returning to Asia at unprecedented rates. Manufacturing in Mexico has been declining for a year. The ratio of labor rates between the US and Mexico is down to 8, from highs of over almost 12 after the last devaluation in 1994, which sparked 5 years of double digit growth in the Maquilas.

When is the Peso going to devalue? That is the $64 million dollar question. Banamex quotes the 1 year forward market for the peso at 10.2 Pesos per dollar or approximately 7% devaluation. Will that be enough to spark a new industrial boom in Tijuana? I don’t think so, but as long as Mexico continues to attract foreign investments such as the $1 billion dollar sale of state-owned insurance firm Aseguradora Hidalgo to Metlife, the peso super-valuation can be defended. Inflation is down to 5% and the Mexican standard of living is improving so the Mexican government sees little benefit arising from a devaluation.

The economy in general and the Peso specifically has been holding fairly strong. The CETES 28 Day interest rates are down to 7% and long-term rates (10 Year) of 10.5% have been achieved by the banks.

If long-term rates remain low, the Mexican economy and specifically the real estate markets will improve. There are two main types of buyers in the market today: Wealthy Mexican families using cash to buy un-leased speculative space for very low prices and institutional buyers purchasing buildings subject to long term leases in US dollars to strong multinationals. There is still not a secondary market for real estate loans in Mexico and this has hurt the economy. Low cost, long-term real estate loans such as those available in the US will help diversify the economy, and allow those that are not part of the few families to participate and create wealth.

The author, has 13 years experience representing US and Multinational Industrial Corporations in theSan Diego Baja Region. He speaks fluent French, Spanish, and English and holds a BS in Chemistry as well as an Mba in international business. To reach Mr. de Kervor, call 1-858-551-8000, or go to www.maquilaproperties.com

© Copyright J-P de Kervor 5/2002

Leave a Reply