Tijuana Real Estate Market Forecast 2009
A buyers market for the first time in Tijuana’s industrial real estate market. Tijuana, Tecate and Rosarito have about 56 million SF of Industrial Real Estate (San Diego has about 120 million SF). The following aerial shows the relative sizes of the markets. The populations of San Diego (2.9 Million) and Tijuana (approximately 2.1 million) are similar, however the population density of Tijuana is approximately 1100 people per Square Kilometer – Many households have 3 or 4 generations sharing a home. San Diego’s population density is 250/Square Kilometer. San Diego’s industrial buildings are much more expensive to purchase, often fetching more than $100 per SF vs. $18-$45/ SF in Tijuana. Tijuana industrial rental rates average $0.38/SF and San Diego rents for about $0.75

Supply Back in 1988, there was no institutional financing for speculative construction in Mexico. The banks were very expensive and rarely loaned more than 60% of the value. Loans were only given if a US corporate guaranteed lease could be used for collateral. Only wealthy families and groups could afford to build and amortized the loans within the term of the lease, which never exceeded 10 years. Capitalization rates (rate of return) were over 16%. Landlords rulled, This led to a very tight market (often 2-3% vacancy) and most companies had to Build- to-suit and sign up for a 10 year lease term.

The current industrial vacancy rate in Tijuana is 13%, including space for sublease, which is the highest recorded, way up from last years 8% vacancy rate. That represents over 6 Million SF of supply – mostly recently built. What happened? Well, institutional investors like AIG, Calpers, and Sam Zell discovered Mexico, especially Tijuana and Reynosa. They saw the low vacancies, the high growth rates, the low quality of most of the second-generation space and the dollar denominated leases and bought in. Many of the larger families sold at 12- 13% Capitalization rates in the early 2000’s. REITS were allowed to invest with special tax incentives if they used retirement funds and the new Tijuana Building boom began. These companies built spec buildings – 3 Million Square Feet were constructed on speculation in 2008 alone. Until the last quarter of 2008, all looked well and the buildings were absorbed. But then things turned down. Many good quality buildings went vacant as Panasonic, Robinson and Robinson, Douglas furniture, Finegood furniture and many others shuttered operations as the US economy hit the skids. As of January 1, 2009, there are 48 buildings available in Tijuana of more than 40,000 Square Feet – a new record. Now, well-equipped second-generation buildings are competing for what few new clients are looking. Why?

Locations of the currently available buildings show high concentration in newly developed areas. Average asking rent is $0.43/SF NNN overall. There is very little data to determine the actual rates clients are getting, but they are significantly lower and the terms are short and very favorable. It is a lessee’s market for the first time in history of Tijuana’s Maquiladora Industry.

Demand
The unprecedented demand drop off was caused by several factors including:

The strong Peso. The peso was propped up by high cost oil earlier in the year raising labor and utility costs in dollar terms. Raising average fully burdened labor rates to over $3.00/Hour (source: Ruiz Morales Tijuana Labor study for Sept. 2008) for the first time in history. This has dropped precipitously with the reduction in oil prices and subsequent peso devaluation. Now the average burdened rate is closer to $2.25 (Ruiz Morales study for December, 2008). Tijuana labor costs are always under pressure from lower cost offshore sites in Asia. The upside – employee turnover is at historic lows in Tijuana.

The recession in the US is reeking havoc on the Maquila Industry, especially on those affected by housing and automotive downturns. The furniture companies, also assaulted by low cost Asian competitors are reeling and at least half have shuttered operations in Tijuana.

Security issues in Tijuana caused by the war between the drug cartels fighting to supply the US demand for drugs. As the efforts to eradicate the Arrellano Felix Cartel that used to control Tijuana succeeds – most of the top players have been caught or killed splinter groups and the Sinaloa Cartel, which seem to be even more sadistic in their methods, have risen in power. Murder and Kidnapping, mostly of Police and drug traffickers has been increasing significantly. There were 847 murders reported in Tijuana in 2008. This rate is approximately 45 murders per 100,000 and is more than double the previous year. The San Diego Union reports that Tijuana still has lower per capita murder rates than New Orleans, Gary, Ind., Youngstown, OH and its rate is comparable with Detroit, MI.

Current Lease rates

The last quarter of 2008 had very little activity but there were a few sales in the $30/SF range in Otay – buildings that would have sold closer to $45/SF at the beginning of the year. These were bank owned or otherwise distressed. Land prices have dropped precipitously and landlords, who said 6 months ago that they were not selling, now are putting buildings up for sale – especially if they are not leased.

Recent Deals
• Intramerica sold its portfolio to Prologis 13 buildings were included including mostly B grade buildings.
• Sundance Spas Leased a 257,000 SF Building off Blvd. 2000 (CPA – Maquila Properties)
• Panasonic is purchasing Sanyo. There will be consolidation of these two important manufacturers in this market. This is especially significant because these firms supported many other service suppliers –Third party Logistics providers( 3PLS.) Plastic molders, tool shops, etc… 5 www.maquilaproperties.com Baja California Real Estate Services Since 1988 Maquila Properties, Inc • Fluidmaster added another 6 months of term to their La Jolla Property.
• Corrugados leased 83,000 SF for a short Term from Prologis in Otay. • Sony Leased 319,000 SF in Alamar from Prologis plus 154,000 SF in El Aguila (Short Terms)
• Douglas Furniture is shutting down (720,000 SF not yet on Market)
• Carrillo is Building 120,000 SF in Pacifico • AvailMed Leased 64,000 SF that Siglo Productos left in La Mesa
• Transportes BajaCal Leased 65000 SF in Otay The future:
• Fewer spec buildings are expected for 2009.
• We expect that the institutional owners will offer incentives to move good companies into their buildings in the form of free rent and Tenant Improvement allowances. This will increase the glut of B and C buildings, which should lower the lease rates significantly in 2009. • Net Absorption was about -600,000 for 2008 we expect little net absorption for 2009.
• Land Values are coming down, Lease rates are coming down in the short term. We expect a major turnaround for end of next year or early 2010. • Peso devaluation (assuming low oil prices) will have a positive effect on demand by lowering labor and utility costs. This will help reduce flight to Asia.
• New Inspection requirements at sea ports should increase demand by increasing time to market for Asian Exporters. • US Polititical pressure to improve workers benefits (minimum wages, unionization, mandatory perqs, etc..) and new ecological rules (Carbon credit market) may increase under democratic rule. This will likely increase demand for space in Tijuana.
• Possible Protectionism against ASIA may increase duties from those countries and drive up demand for near shore facilities.

Please call +1.858.551.8000 or email jp@maquilaproperties.com if you have any questions… Thank you.

Jean-Paul de Kervor, Mba is an instructor of Mexican real estate at USD and president of Maquila Properties, Inc. He is fluent in Spanish and French and has 20 years of Industrial real estate and consulting experience in Baja California. He also holds a BS in Chemistry and is currently the top ranked Mexican Kahuna (over 45) surfer. JP got 7th place in the ISA World Surfing Masters Championships in Punta Rocas Peru in 2008.

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