According to the professionals at CBRE in El Paso, the number of “active users” seeking space in the Ciudad Juarez real-estate market has seen a significant rise in recent years.

Tecma Group of Companies:

Hello. Welcome to another installation of Tecma Talk Podcasts. These are recorded conversations during which we discuss issues that have to do with manufacturing in Mexico, and related topics. Today we have the incredible pleasure of having two fine gentlemen with us. They happen to work for CBRE, which is a company that operates in the Ciudad Juarez commercial real-estate market, as well as others. We have with us Pedro Nino, Jr. and Andres Sandoval. Gentlemen, how are you today?

CBRE:

We are doing well. Thank you for having us. Thank you again for the invitation.

Tecma Group of Companies:

Either Pedro or Andres, could you tell us a little bit about CBRE, before we move on to questions about the commercial real-estate market in Ciudad Juarez?

CBRE:

Absolutely, this is Pedro. CBRE is a global, full service real-estate company. We handle everything from leases and purchases to financing. A to Z is our line in terms of commercial and industrial real-estate in Ciudad Juarez, and worldwide. We have over fifty thousand employees all over the globe. Our office in El Paso is a little smaller, but we are focused on both sides of the border, this being El Paso and Ciudad Juarez. We also handle the Rio Grande Valley in McAllen and Reynosa. More recently, we have also been very active in Chihuahua City, so the border demographic is our focus here out of El Paso with CBRE.

Tecma Group of Companies:

Thank you for that overview of CBRE. Now, to start things off, let’s concentrate on taking a look at a 30,000 foot overview, and a snapshot of the market for industrial real-estate in Ciudad Juarez. Please give us a bird’s eye view of what is happening there now.

CBRE:

This is Andres. The Ciudad Juarez industrial market is measured in square feet. It is about a 64.5 million square foot market, which consists of about five hundred and fifty industrial buildings. If the El Paso industrial real-estate market is added to that, the two markets combined are about one hundred and twenty million square feet.

Of course, Ciudad Juarez is known as the “birthplace” of the maquiladora industry. Things got started in the late 1960s. Today Ciudad Juarez has the largest industrial real-estate market on the US-Mexico border. This is both in terms of square footage and employees. As you know, the Ciudad Juarez area has a strong presence of a diversity of industries. These include automotive manufacturers, makers of medical devices and electronics, and appliances. There are manufacturers that are in the Ciudad Juarez industrial real-estate market that are from all over the world. They are mainly from the United States, but we also have companies from places like Japan, Taiwan, Germany, Sweden, Italy, and France. So, it’s a very diverse market, and, of course, it is a very important part of North America’s manufacturing base because of labor costs and location on the US border. Also, we have a very sophisticated industrial real-estate market in terms of both developers and owners of real-estate, as well as contractors and construction companies.

Tecma Group of Companies:

Thank you. That was a fairly comprehensive overview. Let’s start the questions regarding the Ciudad Juarez industrial market by first taking a look back and then, a look forward. We would like to hear your expert opinion on the topic of what we can expect to see going forward, but first what about 2015? At the end of the year, when you reviewed your information what did you see in terms of vacancy rates, for example, net absorption, and the cost of renting. What kind of things were being developed? Was there a lot of construction going on?

CBRE:

If you recall, the last time we did a similar podcast, we were praising the market for the turnaround and the very active year that we had in 2014. If we fast forward twenty months, the story continues. The Ciudad Juarez industrial real-estate market continues to be active and hot. The vacancy rate as a percentage of the total market in 2014 was 8.8%. At the end of 2015, it was in decline. We are currently at a 6.5% vacancy. That brings us back to the pre-recession 2007 numbers. So we are officially out of the water. The market is very active in terms of vacancy.

If we move forward to look at net absorption, again it reflects some of that very active momentum that I mentioned. In 2014, the industrial real-estate market in Ciudad Juarez had a net absorption rate of 1.8 million square feet. In 2015, it more than doubled at 3.9 million square feet of net absorption. Again, the market is very, very active. These numbers knock the years that preceded 2015 out of the water. It also surpasses the pre-recession peak of the year 2007, at least in the current economic cycle.

You did mention rents. In terms of rents, in line with vacancy, depleted available space has an inverse relationship with rent. Vacancy goes down. Rents go up. That is exactly what the Ciudad Juarez industrial real-estate market is showing. This includes all properties and asset classes: A,B, and C. When we calculate the average, the average lease rate, this is per year on a triple net basis, it is US $4.58 per square foot. This is up from US $4.27 during the prior year. Thus, we saw an almost double-digit growth, at 8%, year over year. Of course, we could break these parameters down by Class A, B, and C. Class A mirrors the average. This property is the class that is anchoring the rates, which are quickly approaching US $5.00 per square foot.

The other point that you asked me to touch upon was development. The Ciudad Juarez industrial real-estate market was very active in terms of development in 2015. It was the year of expansion for the city. We saw nearly two and one-half million square feet of construction deliveries. This, of course, expanded the market. Of those deliveries, nearly ninety-five percent of them were pre-leased or leased while under construction. Current demand has definitely kept up with new construction.

At the end of 2015, construction cooled a bit. We were at seven hundred and twenty-thousand square feet under construction at year’s end. We are, however, expecting another one million square feet plus to deploy in the next couple of months into 2016.

Tecma Group of Companies:

Things have really turned around, thank you for giving us an overview of what’s past, as well as to a glimpse as to what is to come in the future. In doing so, you used some terminology that some listeners may not be familiar with, such as asset classes A, B, and C. Class A properties are the most desirable buildings, while Classes B and C are lesser so.

Tecma Group of Companies:

Maybe you can a descriptive difference between an A property and the other two classes?

CBRE:

(Andres Sandoval)
These classifications of A, B, and C are somewhat subjective terminology because it varies from market to market. Class A in El Paso may not be Class A in Chicago, but here in the Ciudad Juarez industrial real-estate market, Class A buildings are the newest and the best buildings in terms of specifications, quality, and location. Class C buildings, on the other end, are older buildings with that are, basically, technically obsolete. The biggest differential has to do with “clear height.” In Ciudad Juarez, we have some buildings that were constructed in the 1970s and the 1980s that have a clear height of twelve or thirteen feet. This is opposed to the Class A buildings that have a twenty-four, a twenty-eight or a thirty-foot clear height. Class A buildings are very easy to identify. Class C are older buildings with technical obsolescence.

The broader classification is B, which is comprised of everything in the middle that is neither an A or a C. Again this is relative, but that is a brief description of the classifications.

Tecma Group of Companies:

Thank you for clarifying things. We heard information a few moments ago on the differential in the vacancy rates of twenty months ago to the present. Pedro mentioned that, as far as vacancy rates go, we are back to 2008 levels. What kind of activity do you attribute this change to? Is it the result of new businesses coming in to occupy space, or is the activity that you mentioned mainly a function of the expansion of existing businesses?

CBRE:

Most of the activity that we have seen in the last couple of years has been with the expansion of companies that are already operating in the market. Only about eleven percent of the activity has been with companies that are new to the Ciudad Juarez industrial real-estate market. Of that activity, the automotive industry continues to be the sector with the most movement. This is followed by distribution and technology, as well as medical device manufacturers.

Tecma Group of Companies:

It is good to hear that more medical device companies are moving into Ciudad Juarez, since this is a pretty recession proof manufacturing activity.

Speaking again about development, what kind of things are being built in Ciudad Juarez, and where, and who is building them?

CBRE:

Referring back to Pedro’s comment about current vacancy rates being at six and a half percent, a market is considered to be balanced when the vacancy rate is between six and eight percent. At those levels, developers begin building inventory, or spec buildings as we call them. Today, we have several developers building new inventory, or spec space, and these are local developers, as well as institutional developers. We have ProLogis constructing two speculative buildings this year. One will be a sixty thousand square foot building, while the other will be a one hundred and ninety thousand square foot building. American Industries is building one hundred and twenty thousand square feet. Vesta is building two hundred and twenty thousand square feet, and Intermex is building one hundred and ninety thousand square feet. A couple of other regional developers are building spec as well. We have about a million square feet of new space that has either finished construction, or is under construction. These developers are betting on the belief that the market will remain active.

Additionally, there is also build to suit activity happening in the Ciudad Juarez industrial real-estate market. Buildings are being tailor made for a specific occupant for a specific use.

Tecma Group of Companies:

For those listeners that may be prospective tenants, what is it that one might expect to see in terms of square footage availability for lease?
CBRE:

Today there are fifty-seven buildings available for lease in the entire industrial market. These are properties that are in all three classes: A, B, and C. In the fifty to one hundred thousand square foot range, there are about twenty-two buildings available. In the one hundred to two hundred thousand square foot range, there are approximately eighteen properties available at present. There are three buildings available that are over two hundred thousand square feet. Those are total Class A, B, and C buildings. Of course, although the availability of Class A may be lower than the others, the market continues to have plenty available space for new companies and for tenants that are expanding in the market.

Tecma Group of Companies:

Are there any properties in the Ciudad Juarez industrial real-estate market that are available to purchase?

CBRE:

There are some buildings that are available for sale. The ones that are owned, or are being developed, by institutional developers are typically not for sale. This is because they are held under trusts, or “Fibras,” which are real-estate investment trusts in Mexico. There are some that can be bought in the market, however. They can be purchased from either local or regional developers, or from companies that are closing their operations.

Tecma Group of Companies:

That being the case, what are some of the concessions that landlords are offering to prospective lease parties these days in the Ciudad Juarez industrial real-estate market?

CBRE:

Such concessions are a function of supply and demand. Now that supply has tightened, the concessions being offered today are minimal compared to what they were two or three years ago. This is especially true with regard to Class A spaces. In some of the Class B and C buildings concessions can still be negotiated. Typically, these take the form of months of free rent, up front, in a long-term contract. In the newer Class A spaces, these concessions are now rare.

Tecma Group of Companies:

As you said, this is a function of supply and demand. Looking forward, it’s February and it’s still relatively early in the year. As far as 2016 is concerned, what is your gut feeling for how things are going to proceed for the rest of the year?

CBRE:

If we look at a metric that is supported with actual data, we see some possibilities. We track what we call “active users’ in the market. We keep a list of all users in the Ciudad Juarez real-estate market that are looking for space for either lease or purchase. We aggregate that number and produce a total every quarter. This gives us a good forecast of the activity that is likely to materialize. We understand that not all of it will. Our analysis has shown, however, that some will not and close to fifty percent of it will within the next twelve months,or so.

If we  look at that metric for the end of 2015, it shows three million square feet of active requirements. That number gives us a good understanding of what is likely to come. This is well above the average for the last three years. Currently, medical device manufacturers represent one-quarter of that number. Big ones are also energy, transportation, food and beverage and motor vehicles.

Tecma Group of Companies:

How do recent changes in exchange rates affect the Ciudad Juarez industrial real-estate market?

CBRE:

These days, this is a very active topic of conversation for several reasons with the stronger dollar. Most deals are still being done in US Dollars, as opposed to Mexican Pesos. In terms of operations, however, this is where the real benefit lies. A strong dollar results in a discount on wages, if you will, for dollar-denominated operations. The last time that I looked at this information, the Peso had devalued at close to twenty-five percent against the Dollar. Manufacturing wages have seen a fifteen percent discount in response to this state of affairs. There is definitely a positive impact for manufacturers in terms of operational costs.

Tecma Group of Companies:

In general terms, it is safe to say that most maquiladoras have their income in Dollars and expenses in Pesos.

Thank you, this session has been very informative to both the listener and  myself. Given the nature of this topic and its importance, is it possible that people contact you directly in order to ask questions?

CBRE:

This is Andres. Of course, I can be contacted at my direct office number which is 915-313-8802, and Pedro can be reached at his direct line. It is 915-313-8816

Tecma Group of Companies:

Thank you for joining us today. The information that you provided us with is not only very current, but also relevant and useful.

CBRE:

Thanks to you, as well.