The Tijuana industrial real-estate market is one of the most active in Mexico.

Tecma Group of Companies:

Hello and welcome to another installation of Tecma Talk podcasts. If you are a regular listener to these recordings, you know that they are centered upon issues that have to do with manufacturing in Mexico, or manufacturing in Mexico itself. Today, we have the pleasure of having JP de Kervor with us. He is from a company called Maquila Properties. JP please introduce yourself and tell us a little bit about your company before we get into the questions that are on the subject of what is going on today in the Tijuana industrial real-estate market. Welcome JP. How are you today?

Jean Paul de Kervor:

Excellent. Thanks. Since 1988, I have been involved in the Tijuana industrial real-estate market focusing on tenant representation and new start-ups in the high tech industry. I started out in manufacturing, working for a company called California Chemical in setting up a company in Mexico. As a result, I have a lot of experience on the operations side of things. Over the course of the project, I realized that the real-estate broker was making more money than I was, and decided to switch over pretty quickly to real-estate back in 1989.

Tecma Group of Companies:

That sounds like it was a smart move. Can you tell us a little bit about Maquila Properties, and its place in the Tijuana industrial real-estate market?

Jean Paul de Kervor:

Maquila Properties has done in the area of one hundred million square feet of transactions in the Baja region, as well as a few things in San Diego and Monterrey, and Juarez, but, really, we are focused upon the Tijuana industrial real-estate market. We have done some major transactions. For instance, we recently sold the Snapple building to Cerveceria Mexicana. This was a 170,000 square foot building on fifty acres. We have also done a lot of work in the medical field, which happens to be to be one of the hot areas in the Tijuana region. We have done really well with it over the last few decades.

Tecma Group of Companies:

It’s good to hear that. From what we read and see, in terms of industry trends, there is a lot of interest in the Tijuana area. As you may know, Tecma recently acquired a shelter company in your area called Made in Mexico, Inc. It is a pleasure getting involved in the market over there, and having the opportunity to speak with people like you that understand it.

You mentioned that you started in the Tijuana industrial real-estate market in 1989. Can you provide some insight into what is going on in terms of industry in Tijuana today, and how does that compare to what things look like when you first started out in 1989?

Jean Paul de Kervor:

There are a lot of similarities. I actually did my MBA thesis on how to finance maquiladoras. When I first began in the Tijuana industrial real-estate market all the manufacturers would come down to the border, and then as soon as they got there they would say, “how am I going to finance this move? I’d like to buy a building, and I’d like to move my equipment to Mexico.” They quickly found out, back in 1989, you lose your UCC-1 filing and, guess what, your bank doesn’t want to use it as assets against collateralized lending and, not only that, they don’t do real-estate in Mexico.

So, this was a serious question. At the time, GE Capital was pretty much the only game in town for any kind of financing, and there were a few Texas banks doing some financing with the proper US guarantees. That being said, because of the limited avenues for financing at that time, the entire Tijuana industrial real-estate market was eighty to ninety percent controlled by five families, i.e., the Bustamantes, the Fimbres and others. I know that in El Paso and Juarez that a similar, close knit situation exists. Back then we were getting a sixteen to twenty percent cap rate on most of our buildings, and the vacancy rate was at five percent which it is right now.

Back then the lack of financing really made it almost impossible to build speculative buildings, so everything was done on a “build-to-suit” basis. Today we are back to a similar situation, although now there is financing and “Fibras” and all kinds of other ways to finance operations in Mexico. So today, we are seeing speculative buildings being constructed. Back then, in 1988 and 1989, we had, like I said, five percent vacancy, but, if you wanted to get a quality build that was over one hundred thousand square feet, you had to build yourself a building.

Those were kind of fun days. I really enjoyed doing build-to-suits for different big companies, and it was quite a show. We would get a six month deposit down in order to buy steel, bring in a landlord as one of the partners, a construction company as one of the partners and piece something together. Nowadays, things are much more structured. There are a lot of institutions like ProLogis and brothers like Finsa, and all the Fibras out there and McQuarrie that have plenty of capital available at low rates that allow them to finance all kinds of construction. In fact, Vesta, for instance is building the largest spec building that we have ever had in Tijuana. It will be three hundred thousand square feet. I am going to tip my hat to Elias Laniado for doing that. All the fundamentals are extremely strong right now. As I have said right now in the Tijuana industrial real-estate market, we have an approximately five percent vacancy rate in about a sixty million square foot market. The vacancy that exists that is relative to a user that is interested in over one hundred thousand square feet is easily divided along the lines of “A,” “B,” and “C” properties, where about one-third of what is available is Class A property. This would include recent construction with at least twenty-eight foot clear height, and pretty much modern specifications like you might find in the US. Then there is Class B property. These are typically a little older, maybe ten fifteen or twenty years old, yet well-maintained and, maybe, better outfitted in some ways as regards things like power and air-conditioned offices, and, in some cases, maybe even sprinkler systems. Finally, there are Class C buildings, which typically do not have very high ceilings. In these structures there may be a sixteen to eighteen foot clear height, seventy-five percent lot coverage with difficult parking, etc. in the older areas of town.

We have only about thirteen buildings available right now, if you do not include the ones that are under construction. We only have thirteen opportunities above one hundred thousand square feet in the market. One year ago, there were seventeen. We’ve been absorbing space in the Tijuana industrial real-estate market at a rate of about two million square feet per year. We’re constructing space at a rate of about one million square feet per year. I think that construction is going to skyrocket, and I think that we’re going to continue to see a lot of demand in the Tijuana industrial real-estate market, which will result in somewhat of an increase in rental rates.

Tecma Group of Companies:

If the market tightens up, you will see a little bit of that.

You just gave us some very good information on absorption rates and what kind of activity in general is going on in the Tijuana area. If you were looking at it from the perspective of comparing it to information that you get from other regions, how would you characterize the situation in the Tijuana industrial real-estate market in view of other places throughout Mexico?

Jean Paul de Kervor:

There are not a large number of places to compare it to, although some would include Guadalajara, Monterrey, Queretaro and Juarez are pretty much the areas that are in the same size range as Tijuana. Ciudad Juarez has a little bit more vacancy. Queretaro has a little less. The Bajio has been growing very quickly, as everyone knows, with the automotive industry. We are seeing some tightening up in the markets down in that area. As far as vacancies are concerned, the Tijuana industrial real-estate market is pretty much near the bottom among the major markets in Mexico.

Tecma Group of Companies:

Beyond this, when we look at the regions, we know where movement is occurring. If you are an observer of manufacturing in Mexico, you are aware that the center of the country is increasingly automotive. You know that what is going on in Tijuana. There is a lot of activity, as you said, in Juarez, but the concentration of this particular podcast is Tijuana. Just so that the people that are listening that have an interest in the Tijuana industrial real-estate market have a sense of price, in terms of a broad outline, what can you tell us about cost?

Jean Paul de Kervor:

We have a lot of new construction going on. Most of that is comprised of very modern specifications. This means that they usually have at least twenty-eight feet clear height and less than fifty percent lot coverage. They have modern finishes. Some of them have TPO membrane roofs, etc. Those brand new buildings are in the asking range of forty-five or forty-six cents per square foot, triple net. That’s per month. There are triple nets on those buildings, because some of larger corporations charge management fees which can bring price up to as high as six or seven cents per square foot more per month. Although they average about three to four square cents per square foot per month. At this point, as far as the triple net fees are concerned. So, the triple net fees include property tax, insurance and maintenance. Those are typically charged on top of the rent in most of the institutional industrial parks and newer buildings. Where some of the parks charge what we call “industrial gross.” This means the industrial park owner in the Tijuana industrial real-estate market will pay the for property taxes, maintenance and security and other items.

Typically, you would only have to pay for insurance above the cost of the rent of the building in this scenario. It costs about $2500 for a twenty-four hour security guard for a month.

Some of the industrial parks in the Tijuana area have amenities such as on-site childcare and are in proximity to Mexican Social Security health clinics, so there a lot of things to look for. Right now, industrial prices on land which ultimately determines what total cost for construction of a building is. Industrial land goes from US $30 a square meter, on the outskirts of town, to
US $120 a square meter, for something closer to Otay. In Otay proper, it is basically impossible to find any land for sale. It’s just not available. You have to go down to Alomar, or other parts of town. There has been a bit of a feeding frenzy. Vesta just bought another thirteen acres in Alomar. This is raw land with a purchase price of over US $80 per square meter.

Tecma Group of Companies:

One of the things that we do during Tecma Talk podcasts is, given the fact that there is a lot of information to be had and we just scratch the surface. Is to ask those that participate in them if they would be willing to make themselves available to listeners who may have follow-up questions. That being the case, would you be willing to take questions from individuals or companies that may be looking to set up manufacturing operations in the Tijuana industrial real-estate market? If that is the case, how would such persons or organizations contact you?

Jean Paul de Kervor:

Interested parties can always go on www.maquilaproperties.com. They can also call our number at the office. It is 858-551-8000.

Tecma Group of Companies:

Thank you for speaking with us today JP. We’ll also include a link to your LinkedIn profile in the body of this transcript.