Tijuana Industrial Real Estate Update

Sellers Market

Industrial shell lease rates are up to, and over $0.38 per square foot, per month, net of expenses in Tijuana. The high lease rates and lack of US style perks like free rent, sprinkler systems, lighting, and tenant improvement allowances always surprise newcomers to the Tijuana Maquiladora market.

Supply

Tijuana is a series of hills. Flat land is usually only found on Mesa tops and River valleys. Most Mesa tops are covered with a thick layer of expansive soil that must be removed for proper construction. Unlike even the recent past, industrial zoning is harder to get. The municipality does not rubber stamp zoning changes anymore. Good title is often difficult to acquire as well. One day Mexico’s increasingly activist environmental movement may discover the huge area of vernal pools doting the Mesa de Otay Industrial area formerly owned by Ejido Chilpancingo. Sanyo, and Zapetas del Noroeste recently built plants on these sensitive micro ecosystems. These issues drive up industrial land prices by constricting supply. High capital costs also keep spec building to a minimum. Any investor can invest in 30 Day government backed debt instruments called CETES which currently pay over 20% interest.

There are 30 million square feet of industrial and warehouse space in Tijuana. Current vacancy rates are less than 4%. More than half of this vacancy is older, functionally obsolete space that is very difficult to use due to its design. Many do not have proper loading docks, access or are simply falling apart. There is no vacancy in class A space—defined here as newer buildings with loading docks, good access, insulation and a clean appearance.

Modern tilt-up industrial shell buildings can be built Assume here (30,000 to 100,000 SF) in Tijuana for between $25 and $30 per square foot, including 10% office, cafeteria and bathroom build out and 60% land coverage. The building can be completed between 4 and 8 months depending on the size, complexity of the plant and weather. Lease rates for BTS facilities are similar to lease rates for existing product but the lease terms are at least 7 years with 10 year terms preferable due to bank requirements.

Grupo Barsac, last years Tijuana construction and development leader, has started the largest number of new build to suits recently at El Lago Industrial Park. They signed up Jefferson Smurfit, and Giant (Time Warner's T-shirt screenprinters), as well as GET Manufacturing, a high tech contract electronics manufacturer, and CoastCast, an Orange County Golf Head caster for over a half million Square feet of new construction. El Lago is benefiting from the new Gato Bronco road which gives access to the border within five to ten minutes, as well as a public transportation system set up to service the Cetys University next door.

What little speculative space is being constructed is taking a little longer to lease than in 1997 and 1998. Prologis (formerly SCI) North America's largest industrial REIT built twin 131,000 SF buildings in Mesa de Otay- just South of the border crossing. The first building was leased to Bose before completion. Half of the other building was leased to Circle International (logistics service providers) and the last half of the US spec building has at least three offers on the table. Asking rates on a Shell Basis are around $0.40 per SF/month Net plus $0.025/SF/Year for Taxes, Common Area Maintenance and Building insurance. Bose is paying more but had expensive improvements included

As companies grow into larger spaces some leave space behind. This makes up almost one million square feet of the existing space on the market. Centro Industrial Baja California has over 100,000 SF of second generation space available that MG products, a lighting manufacturer left after building an expansion in the Southern part of Chihuahua State, where labor rates are much lower than Tijuana and access to the East Coast Markets are easier. Typical of this type of space, it is cheaper ($0.32/SF Industrial Gross) and has valuable improvements, especially a 1000 KVA power substation (approximate cost $80,000 including capacity fees), already installed, excellent access to established labor pools at a price of an inefficient layout and difficult access.

Demand

There was more than 2.5 million square feet of new industrial construction in 1996 in Tijuana. This represents a growth rate of almost 10%. There are three sources of demand for industrial space in Tijuana: Local (Mexican), US and Third Country.

The Mexican Economy is finally growing again after a sharp decline caused by the 1994 Peso Devaluation. Most economists forecast about 5% GDP growth for the next two years. Tijuana was one of the few cities that began growing before the rest of the country because of the maquila industries ten year track record of double digit growth in employment. This segment of the Tijuana demand for industrial space has been slow in affecting the market although last year Corrugados Celulosa de Sinaloa, a Mexican box manufacturer built a 125,000 SF plant in Valle del Sur Industrial Park, on the South edge of town. We forecast demand to increase at approximately GDP growth rates.

American companies, like Honeywell, Cubic, Mulay Plastics and International Rectifier occupy the largest proportion of space in Tijuana but have only represented about 20% of the new projects in Tijuana. As most of the fortune 500 are already in Mexico, most of this growth in demand will come from mid size and smaller companies who supply the existing Maquilas and from expansions of existing companies.

The largest component of demand for new space in Tijuana since the passing of NAFTA has been third countries desiring a low cost platform for manufacturing within North America. Samsung and its suppliers accounted for over one fourth of the new industrial construction in 1996, with Japanese companies building about 20%. Large Taiwanese companies are now looking to expand in Tijuana as well. The Europeans also added about 7% more to the mix.

NAFTA’s local content rules-requiring that 50% of the cost of a product be sourced in North America for duty free access to the market are forcing many of these companies to look to Mexico. Also, Asian economies have grown and labor rates have climbed to the point that Mexico is an attractive alternative.

Country	1996 Average hourly compensation for production workers
Japan	$23.66
Korea	$7.40
Mexico	$1.51
Taiwan	$5.82
US	$17.20

The Future

Tijuana’s Industrial future is promising. We predict that the net absorption will drop to about 2 million Square feet in 1997 and to 1.5 million in 1998 depending on worldwide economic conditions. If the peso does not devalue and labor costs keep increasing at the current double digit rates, then we will see a reduction in these rates. If another peso devaluation occurs, or significant political problems develop in China, which has labor rates 1/6th those of Mexico, then we could see another big Boom in the Maquila market.

J-P de Kervor, Director of Marketing, Baja California at Colliers International, a worldwide leader in Real estate services can be reached at (619) 306-2066. He is fluent in Spanish and French, holds Chemistry and MBA degrees from SDSU and has been working in the Maquila Industry for 10 years.

© Copyright J-P de Kervor

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