12 Sep 2007

2007 Maquiladora Outlook – Tijuana Industrial Real Estate Market

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2007 Maquiladora Outlook – Tijuana Industrial Real Estate Market
The Maquila industry as a whole is stable with growth in the Automotive and Aerospace industries including a huge investment in Queretaro by Canadian Aerospace leader Bombardier. But some industries are now being severely affected by Chinese competition. The furniture industry, for example, is reeling as many companies are feeling the downturn in US housing starts as well. Bush Industries, Canyon Furniture and Finegood furniture have vacated some 500,000 SF in Tijuana alone.

Tijuana Maquila Statistics The graph below shows that the man-hours worked in the Maquila Industry in Tijuana (green line) has taken a small downturn while the value of production (red line) has increased. This increase in productivity is a sign that companies are competing through automation and climbing up the value added chain. Tijuana has long been a leader in TV production, but it lost much of the smaller picture tube business to China and is now concentrated in large plasma and LCD units.

Mexico’s economy has been very strong due in large part to the price of crude. Construction has seen strong growth as the chart below indicates. Although local information is harder to find, Tijuana’s contractors are very busy with infrastructure work and new housing leading the way.

Current Vacancy Our data indicates that there is a vacancy of approximately 3.7 Million SF in the Tijuana Industrial market including new construction slated for 2007 delivery. This is about 8% vacancy, which is relatively high for this market. The chart below shows the Vacancy and rent by Grade of building. Grade buildings are modern, newer tilt-up facilities with 50% or less lot coverage ratios (size of building divided by the size of the lot), 20ft. Minimum clear heights, green areas, plenty of docks and easy access to main thoroughfares. Some of the buildings listed are currently under construction. B grade are usually functional second generation or newer block or metal buildings with 60% or higher lot coverage. C buildings usually have some functional obsolescence and lack docks. They are usually smaller older buildings with higher than 60% lot coverage or old roofs, difficult access, little parking or other factors that make them relatively undesirable by the majority of the market.

Grade A B C
Number of Buildings 10 30 23
SF Total 1,220,743 1,777,760 749,803
SF Average 122,074 59,259 32,600
NNN Rent Average $0.43 $0.40 $0.32

As one can see, the rental rate drops precipitously with Grade of building. Most of the buildings in the market are A or B grade however. We have seen most of the D or F buildings redeveloped for other purposes.

Vacancy by Submarket Most of the current inventory is in the South Submarket, which includes Pacifico, Nordika Valle del Sur, El Rubi, Agua azul and Morelos Industrial Parks. Part of the reason is that there has always been a huge traffic problem reaching the US market via Otay from this area due to congestion around the famous 5 y10 intersection of the Periferico with Blvd. Diaz Ordaz. This area is a hub for public transportation via Calafias and the home of the gas station. New bridges, better drainage and removal of the Calafias and Gas Company are all under way and should greatly improve the situation. These improvements along with the new Boulevard 2000 to Rosarito as well as the opening of the Eastern part of Tijuana for development are changing the traffic patterns significantly and may bring back some of the former strength of this submarket.

Central El Florido Otay South West Almost 400,000 SF of the Otay vacancy is under construction. Most of that will be leased before they are finished as this sub-market, due to its proximity to the commercial border crossing, continues to be the most desirable location. 5 of the buildings being marketed in the El Florido submarket are older C Grade buildings leased on a short term basis and need repairs, depressing the average rent in the market, which commands rents in the $0.40 range for A buildings. This market has been very strong as the new Boulevard 2000 and improvements to the Via Rapida have made the drive from the border less than 20 minutes.

Some of the transactions we have completed since the last update include:

1. Coast Signs signed a 5-year lease on the 25,000 SF former Fabtech in Pacifico
Industrial park.
2. Masterpiece arts took the 69,000 SF SISSA building in Otay on a 5-year lease.
3. Kyoung Il purchased the former 68,000 SF Kyosha building in El Aguila Industrial
4. D& D tool leased 12,000 SF in Otay
5. Manumex, a board sports manufacturer leased 30,000 SF in 20 de Noviembre.
6. Seal Seat leased 46,000 SF in El Rubi.
We expect the maquila market to show slow growth in the next year. Factors to watch
include the price of oil, if it increases then we would expect the peso to stay strong and
therefore to depress Mexican export growth in manufactured goods and US
manufacturing growth (plus is good), and Chinese currency valuations (Higher is good).
Until next time, please feel free to contact us with any questions on the Tijuana Industrial
Real estate markets.


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