Mexican industrial real-estate market veteran, Rafael McCadden Talks with Tecma about the conditions prevalent in Mexico in his area of expertise.

Tecma Group of Companies:

Hello. Welcome to another edition of Tecma Talk podcasts.

The podcasts that we put together are typically on Mexican manufacturing issues, or issues that are on topics related to Mexican manufacturing. Today we are very fortunate to have a gentleman by the name of Rafael McCadden join us. Rafael is an expert on Mexican industrial real estate market issues.

Rafael, good afternoon. Perhaps you can give us a little bit information on your background? After that we can discuss some questions that will hopefully orient the audience with respect to what’s happening in the Mexican industrial real estate market at present. How are you doing?

Rafael McCadden:

Yes, thanks, Steve, thanks for the invitation. I’ve been in real estate most of my life, but with the Mexican industrial real estate market, I would say close to 20 years. Initially I was the head of the Mexican Association of Industrial Parks, which is like the NAIOP in the U.S., and then I joined Colliers International nine years ago, and I have been basically doing tenant rep for multinational corporations.

Tecma Group of Companies:

Rafael, really? I heard you say that 9 years ago, it’s been 9 years?

Rafael McCadden:

Yes!

Tecma Group of Companies:

You’re making me feel old. We’ll skip that topic right now because it doesn’t seem that long ago when you worked for the Association of Mexican Industrial Parks.

Let’s talk about what’s going on today, however. It’s my understanding that there’s some consolidation going on right now in the Mexican industrial real estate market. Can you first of all verify that that is, in fact, the case, and if so what form is that consolidation taking?

Rafael McCadden:

Sure. I would say that in the past seventeen years there’s been some consolidation going on in the market. Before that, basically there were Mexican-owned developments that were local. Maybe some of them were regional that were attending the market. The first people that started moving into Mexico were Prologis and then GE Real Estate so they started buying portfolios. Then there’s been more and more interest, especially from U.S. and also European regions. They started consolidating and buying portfolios here and there, so I would say that the top ten largest portfolios in Mexico in the past 15-17 years, there’s been a lot of ups and downs and consolidations, a lot of movement there. Recently what happened is that Mexico was able to incorporate also what we call FIBRAS in Mexico, which is basically the same thing as REITS which the real estate investment trust in the U.S. can obtain funds to be able to fund projects in a cheaper way, which makes them more competitive. That’s what’s happening—the situation there is that now I’m basically going into how are these Mexican REITS are impacting lease rates, and how they’re taking over the market The other developers can’t compete with these funds because they can’t offer the same lease rates. This is because the funding that they have is more expensive. What’s happening is that more and more big fish are eating up the smaller fish.

Tecma Group of Companies:

Which is not unusual in any industry, but at the end of the day the benefit of that is, and I would logically conclude that as a result of what you’re talking about the lease rates in the Mexican industrial real-estate market are lower than they otherwise would be, which in turn makes Mexico’s economy at least in terms of foreign investment and manufacturing more competitive, would that be an accurate statement?

Rafael McCadden:

Yes, for sure. Lease rates are more competitive in Mexico because the funding for the construction of the industrial park center and the buildings are less expensive and these large REITS are really pushing to become the leaders. They are basically taking lower returns on projects. This is benefiting the tenants that are looking for buildings to use and occupy.

Tecma Group of Companies:

So it’s good all the way around because, obviously, if companies feel that Mexico is more competitive because of the lease rates that are more competitive that’s an impetus for more job creation, which trickles down to the benefit of the worker who mans the jobs that are created. It seems like an all around win-win type situation.

One of the things, and you’re kind of smack dab in the middle of this because you’re based in Mexico City, and a lot of this is happening in the South-Central part of Mexico, the states of Guanajuato and Queretaro, in particular, the investment over the last 2 or 3 years in the automotive industry has been pretty phenomenal in terms of growth. I believe that Mexico, and maybe you can correct me on this, that ten or fifteen years ago only two out of every ten passenger vehicles made in North America were made in Mexico. I think that today the number is four, or thereabouts. With this growth in the auto industry in Mexico what’s the impact on the Mexican real-estate market in those particular areas and across Mexico in general?

Rafael McCadden:

Basically, the auto industry is growing tremendously. It’s basically going to duplicate it’s production in less than five years, so that’s unbelievable. We were just last year producing maybe two million cars, and it’s going to go up to four million in less than five years. That’s how fast the industry is growing in Mexico. The situation there is that most of those new plants are basically Japanese. I went to the new Nissan plant in Aguascalientes. It is huge, and it has two supplier parks right next to the main plant. Automotive industry growth is happening in the Bajio region which is just north of Mexico City, that encompasses basically four states, which is Aguascalientes, San Luis Potosi, Queretaro, and Guanajuato.

What’s happening there is that a lot of the tier ones, tier twos, and even tier threes are moving in to do a just-in-time sequencing for OEM plants. The plants are, the new plants in that area are basically Japanese plants, or Nissan, Honda, Mazda, which has a JV with Toyota, but also now south of Mexico there’s a new Audi project, which is a German company which is also an interesting European investment. The situation is that there is so much activity that there’s new industrial parks being developed. There’s not enough buildings that were built a couple years ago they just have to do build to suits, and of course in that case there’s more and more developers coming in from other regions of Mexico to try to supply this huge demand in the Mexican industrial real estate market. Not necessarily all of them are leases, but especially Japanese companies are more interested in buying land inside of industrial parks. But still, it’s a huge investment and it’s generating a lot of jobs and it’s very positive news for Mexico.

Tecma Group of Companies:

One practical question that I want to inject into the conversation, because of our geographic position, most of our listeners—the majority—are in the U.S. and in Canada. From your perspective—you’re very well versed in both cultures, in business practices on both sides of the border, real estate issues on both sides of the border—when a company that is going to Mexico and is looking for lease space, the kinds that you deal with on a daily basis, are there things that they should take into consideration that would be Mexico-specific when doing this kind of shopping? Are there things that they might not be accustomed to when they are going through the same process in the United States? Maybe some advice that you could give people as to where differences might lie?

Rafael McCadden:

Sure, I would say that mainly it’s pretty similar. Lease rates in the Mexican industrial real estate market are in U.S. dollars, most of the time—not in Pesos. I would say one of the big differences is the power issue. In Mexico, the electrical power is run by CFE, which is a government-owned nation-wide company. Sometimes companies that come here are are a little surprised that they have to pay for KVA. That’s pretty much on the negative side. On the positive side, I would say that everything else—attorneys, brokers, and everybody’s used to working in English, with typical leases are drafted similar to the way that they are in the U.S. or Canada. I would say doing business as usual would be a way to explain that it’s very similar to the way they process leases in both Canada and the U.S.

Tecma Group of Companies:

Okay so in other words, even though you’re crossing an international border it’s not as esoteric as one might believe, if one has never done it.

Rafael McCadden:

Yes, that’s right. Most of the people are helping users to set up their shops in Mexico are bilingual. They know what they’re doing, and I would say most of the time there’s no surprises.

Tecma Group of Companies:

That’s a good thing.

One thing I want to go back to is your statement about electricity and KVA and the CFE being a monopoly. My understanding is that everybody looks at about a few months ago when the news came out when the legislation was enacted regardingEnergy Reform in Mexico. For the first time in decades you’re going to have the foreign and domestic private sector companies participating in the exploration for natural gas and for oil. Also, my understanding is that one of the other items that was included in this law was the future establishment of an independent power grid that will enable companies, industry users, and others to go to exercise another option beyond just the CFE. Perhaps customers will get more competitive pricing. Is that something that you think will maybe make a difference and create a more competitive market for energy in the future for customers that go down to lease buildings in which to manufacture in Mexico?

Rafael McCadden:

Well, we’ll see to that, I don’t know. I think it’s a bit far-fetched, but it’s a definite possibility.

Tecma Group of Companies:

Okay, now with regard to the Mexican industrial real estate market itself in concrete terms, having been involved in it for 20 years, what do you see going forward five years from now?

Rafael McCadden:

I think it’s going to be five great years for Mexican developers, for brokers, for lawyers—the next five years the trend is a growth. Even Chinese companies are now setting up shop in Mexico, and,of course, there are U.S., Canadian and European companies. It’s not only in the auto industry. It’s also in aerospace. A lot of medical device companies are interested in the Mexican industrial real estate market, because U.S. and Canadian populations are reaching retirement. Mexico is very competitive, and its workforce is very young and eager to learn. That’s one of the huge things that is attracting a manufacturing companies to Mexico. We see a bright future in industrial real estate in Mexico for the next five years for sure.

Tecma Group of Companies:

Well listen, folks who take the time to download and listen to our podcasts—whether on a laptop, a desktop, or a mobile device—sometimes have questions that go beyond the scope of the discussion that has been conducted during the podcast itself. If individuals want to get in touch with you, whether to inquire about a building that you have listed, or how to find something that’s appropriate for them, or just to ask you questions on general issues regarding Mexican industrial real estate market. Number one, would you be willing to accept those questions, and number two, if the answer to that is yes, how would people go about getting into contact with you?

Rafael McCadden:

Sure, thanks. Well they can of course call me. Most of the time I’m in my office if I’m not traveling around Mexico. You can dial Mexico’s code is 52 then 55 520-3695. Or if you email, rafael.mccadden@colliers.com

Tecma Group of Companies:

Rafael, thanks a lot for bringing us up to speed regarding issues in the Mexican industrial real estate market. It’s really great to hear that you’re looking forward to a positive five years in the future and we wish you well and a lot of success.

Rafael McCadden

Thank you, thanks so much.

Tecma Group of Companies:

You have a great day.

Rafael McCadden:

You too.