20 Sep 2012

Tijuana Commercial Real Estate Market

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The Tijuana Commercial Real Estate Market

September 2012
Where are the opportunities and what are the risks?

Economy When the US sneezes-­- the old saying goes –
Mexico catches a cold. Even after Mexico caught bird flu, was ravaged by a drug war, was priced out of low end manufacturing by China, and witnessed the decimation of its biggest
export market, the Tijuana commercial real estate market is actually in pretty good condition. All markets seem to have bottomed out and are on the rebound.

Many investors are on the sideline pending the US elections, and the effects of the government change back to PRI leadership in Mexico. Users however, in the aerospace, medical, packaging, printing,
furniture and auto industries are expanding.

Why? Well for one, its nascent Mexican mortgage market is not big enough for the US real estate debt bubble to affect the majority
of its working people. Mexico’s lower government debt rate, (43% vs. 103% of GDP for the US) bodes well for the future value of the peso as well. Baja California coastal areas,
Cancun and other tourist markets were overheated by Americans with “no-­-doc” loans putting down 6 figure deposits at lavish parties in downtown San Diego for ocean front

Baja Ocean view condo boom and bust: Thirty separate condo complexes were started in the mid 2000’s along the beautiful, formerly peaceful coast between Tijuana,
Rosarito and Ensenada. The beautifully rendered Trump Towers, which were never built, give us an illustrative example. Buyers, without bothering to look at the site, paid out
upwards to 30% in deposits totaling $32 Million on 122 condos ranging from $300,000 to $3 Million. If the gullible investors had bothered to check, they would have found the
property is 400 yards from the primary settling ponds of Tijuana’s sewage treatment plant. Morning offshore winds carry a stench right to the penthouse.

Why do North Americans,who would never buy property sight unseen, or put property in a straw buyers name in the US, seem to fall for all kinds of scams in Mexico? I am not sure, but I can advise you
how to avoid most common pitfalls. Hire an independent agent or lawyer that knows the market and does not work for the seller. If the Trump buyers had gathered information from
an independent source they would have gotten the real scoop on the poop, but instead they used the attorney of the seller to draw up the papers and put down payments into
escrow at a champagne catered event with Ivanka Trump’s word that the site was going to be “the best of the best”. 1 The property is now for sale with a very nice sales office
and a hole.

There are many bankrupt and bank owned condo shells along the coast that are deteriorating for lack of demand. Adventuresome investors could pick up property for a
significant discount on construction. Demand will return as the reputation for drug violence subsides, and baby boomers look for less expensive retirement communities close to
Southern California. Some nearly finished bank owned towers are available for a fraction of the original cost. Financing is the big issue, as it has been for so many years. But
well-­-heeled Mexican families with little debt will buy up the best options and will return condos to the market at prices around ½ of the 2007 prices. Aging baby boomers will
return to enjoy ocean-­-view living, with low cost help, as prices return to normal in the US.

Development surrounding the Valle de Guadalupe wine country, including vineyards, hotels and restaurants are attracting new investments as vintners come to market with Mexico’s best wines. New wines are getting international acclaim and the coastal hills are
attracting European investors.

The timing may be a bit premature, as the long border waits and the perception of insecurity will persist and many people that formerly flocked
to Newport for lobster on any given weekend are staying closer to home.

The Maquila Market The export oriented maquiladora market had already been buffeted by the Far East competition, (China, Viet Nam and others) with labor costs as low as $0.15/hour vs. Baja’s $1.50/Hour. One recent client told us that he is hiring college graduate programmers
in the Philippines for $6/day. Even with overseas shipping times and costs, Mexico could not compete. 1 http://articles.latimes.com/2009/mar/07/business/fi-­-trump7 Thomson,
Mitsubishi, Lucky Goldstar, Sanyo, Hitachi, Toshiba and others had invested heavily in the big screen CRT business, which, almost overnight, was killed by Plasma and LCD
technology. Aggressive moves by Mexico’s commerce secretary exacerbated the situation with countervailing duties on electronic components from China that were unavailable in
the Americas, reducing the value of the tariff advantage of duty free North American Free Trade Agreement (NAFTA).

Tijuana Total SF available over 91,000 SF = source: Maquila
Properties European market issues are causing some problems in the market here as a reduction in German solar subsidies, caused Unisola to shut down its showpiece 300,000 SF
plant in Nordika Industrial park in Tijuana. The sale of Sony’s pioneering 600,000 SF assembly plant to Foxconn has also caused some of Sony’s suppliers to be forced out of
business. One plastic molder will soon release over 300,000 SF into the market. Consolidation continues in the consumer electronics fields as Panasonic digests the purchase of

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