Mid year 2005 Tijuana Industrial Real Estate Market Update

The Market for large space in Tijuana is cooling from its frenetic pace of 2004, but is still strong. Finished industrial land prices have reached an all time high of over $90/SM ($8.36/SF) in the Otay market near the US border crossing. This is partially caused by the lack of Industrial land with services throughout Tijuana.

Lower quality buildings are now renting for $0.33/SF while higher quality buildings are up to $0.40- $0.48 per SF, especially in Otay. These are NNN lease rates that do not include property taxes Insurance or Common Area Maintenance.

Construction prices rose to the $28/ SF range for 24ft. high ceiling, modern Tilt-up 50-100,000 SF shell buildings with 10% offices. Finished industrial land prices are ranging from $5 - $9 /Square Foot, averaging $6.50/SF for finished industrial lots in Tijuana.

Available inventory over 50,000 SF consisted of only 17 buildings and just about 1.6 million SF as of December 2004. Pacifico, Tijuana's largest industrial park, had the largest inventory, including several sublease deals like the Avery building with 150,000 to 250,000 SF available. The price range was $0.33- $0.40 NNN in Pacifico.

Mesa de Otay, really a large industrial area incorporating Chilpancingo, Tijuana, Seccion Dorada industrial parks and Ciudad Industrial, Tijuana's oldest Industrial area, had the next largest availability. Much of the availability was second or third generation and the lease rates ranged from $0.33- $0.48 per SF. The newer facilities, all over $0.40 NNN, moved very quickly - Prologis sold out its entire second phase, encompassing 4 buildings with over 1/2 million SF before the buildings were even finished.

Large Otay Mesa natural gas and propane users will soon enjoy access to natural gas distribution by pipeline. This will be a significant savings from the traditional trucked in propane. El Florido also has access to the pipeline and Natural Gas distribution for the rest of Tijuana is planned.

The overall Tijuana Industrial vacancy rate is down to around 6%. New construction will add over 1 million SF (to the existing approximately 40 million SF of total Industrial space) in 2005 but this will be absorbed and vacancy will continue to go down.

The majority of new construction projects are funded by wealthy, local families or institutional investors. These are generally all cash transactions without loans from the usual (for the US) financial institutions. Until financing becomes accessible for users or for speculative development, there will be little chance of overbuilding in the Baja California market and we expect rental rates to climb.

These are buildings over 50,000 SF. Smaller buildings often have lower grades.

Definitions: "A" grade are modern, tilt-up construction with 50% or less land coverage ratios, high ceilings (24 ft.) and security. "B" grade buildings are often 5 years old, second generation facilities with up to 60% land coverage. "C" grade buildings usually have lower ceilings (16-18 ft.), block construction with more than 10 years of age and difficult truck maneuvering space or parking. "D" grade buildings are generally "0 lot line" 15+ years old and have difficult truck access. "F" grade buildings are functionally obsolete or dangerous, have little parking and/or inadequate zoning.

Major transactions completed by Maquila Properties this year include:

• MPA Leased a 186,000 SF built-to-suit in EL Lago
• Wilson Greatbatch leased 140,000 SF at Prologis
• Crockett Container leased 100,000 SF at Prologis
• GE Leased the 60,000 SF Panasonic building on Blvd. Industrial in Otay from IGS.

Other Significant transactions include:

• Dorian's completed a 300,000 SF distribution center in Limon Arboledas
• DJ Orthopedics built a 200,000 SF facility in El Florido
• Endar subleased the 215,000 SF SONY facility in Pacifico
• Hitachi Bought Casio's190,000 SF facility in La Frontera
• Hitachi Leased 176,000 SF at Prologis park
• CMI Leased a 150,000 SF building at Chilpancingo Industrial Park
• BTS leased 125,000 SF at El Lago
• TYCO leased 120,000 SF at FINSA TIP
• Suntron Took 80,000 SF at FINSA- TIP
• CPA Bought 5 Hectares of land for a 230,000 SF spec building which very well may lease before any walls are raised.
• KIA is negotiating to purchase a huge (100 hectares plus) parcel in Rosarito for an automotive plant

Maquila Properties was the leading industrial real estate brokerage firm in terms of SF leased in Tijuana in 2004. Followed by NAI Mexico, CBRE, John Burnham & Company and several smaller firms.

Economics, macro to micro:

Instead of asking "When is the peso going to devalue?" The question du jour is " When is China going to float its currency?" The pesos slide has been steady until very recently when the weak dollar combined with high oil prices have buoyed the Peso to a steady 11 pesos to the dollar. A Chinese revaluation would improve Mexico's competitive situation and might be the world economy's best hope for a delay in the Chinese juggernaut's takeover.

The US economy is expected to slow next year and this may have a negative effect on the Maquila industry, which historically has been highly correlated to US manufacturing growth.

According to Grubb and Ellis, San Diego Industrial vacancy is down to 7%. A strong US market with its high rental rates tends to increase activity South of the border.

Job Growth:
Maquilas are coming back to Tijuana. After reaching 557 Maquiladora businesses in Tijuana in 2003, the number has inched up to 574 by the end of 2004 according to INEGI. The number of workers employed grew to 157,953 in January, a 10% increase from the previous year.

TIJUANA VALUE ADDED (1000 PESOS) As the chart above indicates, The value added at Tijuana Maquiladoras has increased to 2001 levels and we expect to surpass the 2000 peak by a small margin in 2005. The value added at the Maquiladoras includes overhead, Mexican profit, (minimal as these plants are usually cost centers) and Mexican labor. The average Maquila imports 98% of its raw materials from the United States so, other than incidentals or packaging, there is little Mexican product in the value added.

Maquilas employ only 48.36% of Tijuana's workforce, down from 57.4% in 2000, which may help temper wage inflation if there is another increase in demand.

The Maquila Industry will see a bit of slowing in the rate of increase unless political or economic shocks affect the market. This will bring the already tight market to a lower vacancy rate, increasing rental rates and land prices for industrial buildings in Tijuana.

The author, Jean-Paul de Kervor has over 16 years experience representing US and Multinational industrial corporations in the San Diego Baja Region. He speaks fluent French, Spanish, and English and holds a BS in Chemistry as well as an Mba in International Business. To reach Mr. de Kervor, call 1-858-551-8000, or go to www.maquilaproperties.com

© Copyright J-P de Kervor 2005