20 Dec 2003

2003 Summary Tijuana Industrial Real Estate Market

The Tijuana Industrial Real Estate Market is in flux. Asian electronic consumer product manufacturers and their suppliers have pulled out of Tijuana, while firms from the automotive, medical and service industries have swept in to fill the void. The skyrocketing vacancy rates, which went from about 3% in 1999 and reached near 11% in 2003, are leveling off closer to 10% at end of 2003. This may be a seasonal effect as typical year-end inventory bulges are shipped to the US. Average net rental rates have dipped to about $0.33/SF/Month.

Although these vacancy rates are very high compared to recent history, REIS.com reports that the average US industrial vacancy rate is just under 11%. Average rental rates are about $0.40/SF in the US industrial market overall – not much more than Tijuana pricing. But firms do not come to Mexico for real estate savings.

Older buildings, whose main attraction is proximity to a walk-up “laborhood” are leasing in the $0.30/SF range (or going vacant) while high end space near the commercial border crossing at Otay Mesa is renting for over $0.48/SF/month. Otay Mesa’s vacancy is under 6% and most of that is in older, functionally obsolete space. Asking prices are now going below $0.30/SF per month for older class B or C space even in Otay.

With a 12% reduction in Maquila employment from its peak in 2001, Otay factories are seeing little turnover, and the outlying sites cannot command the prices they once did. The landlords in the outlying areas have not dropped their prices low enough to divert companies from the attraction of the border so the vacancy factor is over 30% in some of these older parks.

For the first time in the 15 years it is not a seller’s (or lessor’s) market in Tijuana. Those maintaining the attitude, “if I have to compete, I don’t want the business” are now holding onto hundreds of thousands of empty square feet. Since most have no loans to service against these properties, they are content to sit and wait out the cycle.

Construction prices remain in the $25/ SF range for shell buildings with 10% offices. Land prices are ranging from $4 – $8 /Square Foot, averaging $5.50/SF for finished industrial lots in Tijuana.

Although Maquila starts are down, construction companies are busy modifying and re-developing industrial space in the best located markets.

The Driver – Export Jobs
By the time the newspapers are reporting it, you know the trend is over. China is much cheaper than Mexico for low tech, small commodity manufacturing, especially in those industries that have been marked for takeover by the Government. Even larger items like furniture are landing in its US final markets for less than cost in Mexico in some instances. The Asian exodus, fueled in part by Derbez’ folly (countervailing duties as high as 100% on Chinese products) has run much of its course. The Chinese lack of protection for intellectual property and slower speed to market is forcing US companies to locate its high tech or just-in-time products closer to home.

According to DEITAC (Tijuana’s private industrial development association) Tijuana lost only a net 830 jobs in 2002 and actually gained over 5000 employees by the end of the third quarter of 2003. Tijuana industrial real estate seems to have hit an inflection point. They report that over 3 million SF have been absorbed during the last 2 years. (These numbers are inflated as they under-represent facilities like SONY’s 200,000 SF and the former US assemblies 252,000 SF plant that are available for sublease).

Major transactions in Tijuana 2004:
Maquila Properties represented the tenant in the largest industrial lease transaction in Tijuana – American Racing, a division of Canada’s Noranda Inc. leased 240,000 SF in Chilpancingo Industrial park in a deal worth over $5 million.

Other important deals concluded this year include:

  • Alaris leased the 180,000 SF former Polk Audio plant in El Florido.
  • Hitachi Transport Leased 176,000 SF in Mesa de Otay.
  • PPM leased approximately 150,000 SF formerly occupied by International Golf in Valle del Sur.
  • PDC Leased the 50,000 SF former Nikkai facility in El Florido.
  • Kyomex built a new 100,000 building in Pacifico.
  • McCains and Labomex occupied the former Cannon buildings in El Rubi.

The Future
The biggest news is President Bush’s proposed immigration reform. If a large number of Mexicans are allowed entry to the US, as predicted by some, then lower cost labor availability in the US may reduce the number of companies that come to Mexico and many skilled workers may leave a vacuum in the border markets raising the costs and reducing the skill levels available in Tijuana.

A new, less onerous Maquila Decree is due which should streamline the bureaucratic process of opening a plant in Mexico.

Other issues still pending include:

  1. The opening of cross-border truck traffic, as stipulated in NAFTAwhich should improve transportation options and therefore lower costs.
  2. Natural gas distribution and LNG facilities will lower energy costs.
  3. Reopening of the AZ Eastern rail lines to the East, as well as the connection of the Ensenada port to the existing Rail system which will also lower costs.
  4. Toyota and another Japanese Auto Manufacturer are attracting new busisness to the area.
  5. Junk can now be brought to Mexico legally, which may sprout a new industry to complement the existing recycling businesses along the border.

These should all improve the infrastructure issues, which have dogged the industries competitiveness.

Please call Maquila Properties at 858.551.8000 or email Jean-Paul de Kervor at jp@maquilaproperties.com for more information.

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