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The industrial real-estate market in Ciudad Juarez

The industrial real-estate market in Ciudad Juarez

 

Photo Credit: www.cpexecutive.com

 

Tecma Group of Companies:

Welcome to another edition of Tecma Talk podcasts, during which we speak about issues that are related to manufacturing in Mexico. Today, we are pleased to have two gentlemen with us, an welcome them, from CBRE in El Paso, Texas and Ciudad Juarez. We are going to speak about the industrial real-estate market in Ciudad Juarez; What happened in 2014, as well as take a look into the future, in order to see what may be in store for the industrial real-estate market in Ciudad Juarez in 2015. Andres Sandoval and Pedro Niño are with us today. How are you doing gentlemen?

CBRE:

Very well. Happy to be participating in this Tecma podcast.

Tecma Group of Companies:

Thank you very much. Generally, what we do to begin is to have our guests introduce themselves, and give a little bit of their background so that people can have a sense of the context from which
they are speaking.

CBRE:

Thank you. My name is Andres Sandoval. I am an industrial broker with CBRE. I have been with CBRE for about three years, and have twenty in the industry. I have been specializing in the Ciudad  Juarez industrial real-estate market, as well as the Chihuahua and El Paso, Texas industrial markets.

My name is Pedro Nino. I am also with CBRE, and am an economist by education. I’ve had the privilege to have worked with CBRE over the last two years, as their research coordination. I am part of a much larger Texas research team. My role is to service the industrial real-estate market in Ciudad Juarez, that of El Paso, as well as the McAllen industrial market down in the valley of Texas.

Tecma Group of Companies:

From your perspective, we are going to get some very good information today. If you look at things from the standpoint of research that you most likely just included for 2014, Pedro, what do things look like from CBRE’s perspective regarding things like the total inventory in the industrial real-estate market in Ciudad Juarez, what kind of occupation rate has existed during this period as opposed to the year before, let’s say, as well as any activity that is going on in new building construction? If you could enlighten us on those issues, we would appreciate it very much.

CBRE:

Currently, the industrial real-estate market in Ciudad Juarez has a base of sixty-two million square feet. Which make it one of the largest, if not the largest, industrial real-estate markets on the US-Mexico border. This is not only in terms of square footage, but also in terms of its labor force. Manufacturing jobs in the industrial real-estate market in Ciudad Juarez, currently stand in the vicinity of two hundred and twenty thousand manufacturing jobs. This is very important to Mexico, as it is approximately ten percent of allmanufacturing jobs in the country.

In terms of vacancy rates, the 2014 vacancy rate in the industrial real-estate market in Ciudad Juarez at the year end was 8.8%. Now this was very, very significant given that two years ago we were at a near fifteen percent vacancy rate. So, over the course of the last eight quarters, the city of Ciudad Juarez has managed to get rid of almost have of its vacant space.

Tecma Group of Companies:

It’s interesting that you say this. We recorded a podcast very recently with someone from Tijuana. They expressed numbers that were very significant in terms of betterments of occupation rates. So, we may able to extrapolate this particular phenomenon throughout many places in Mexico, Pedro. Do you feel that this would be a reasonable assumption?

CBRE:

I definitely do. We have actually looked at some macro data. The macro data show that, in terms of industrial production, one of the strongest sectors nationwide is manufacturing. Manufacturing has recovered from the recession, and its actually back on its long-term trend. Although overall industrial production is overall a little bit lethargic, both in the U.S. and Mexico, the manufacturing sector in Mexico is doing phenomenally.

Tecma Group of Companies:

Thanks for that bit of insight.

CBRE:

If I can go back to the 2014 numbers, another parameter that we track is net absorption. Net absorption is gross absorption, which we track as space that is occupied minus any new vacancies. The net number for industrial real-estate in Ciudad Juarez in 2014 was 1.8 million square feet. Now going back to that same eight quarter comparison, over the last two years, Ciudad Juarez has had close to four and one-half million square feet of of positive net absorption. Again, that is after I subtract all vacancies in the industrial real-estate market in Ciudad Juarez. A very strong last twenty-four months have taken place in Ciudad Juarez.

Tecma Group of Companies:

That is encouraging to hear. Drilling down into those numbers and seeing what they are composed of in terms of industry, what percentage of that absorption that you just spoke of would be consisting of companies that are new to the area, as, perhaps, opposed to companies that are expanding operations that are already in process?

CBRE:

I can’t put an exact statistical number on that, but, based upon the transactions that we have tracked, I would say that it is split about right in the middle, fifty and fifty percent. There is a lot of investment coming into the city in the form of new construction, but there are a lot of expansions that are taking place.

Tecma Group of Companies:

With regard to the expansions and the new companies, Andres, I know that we have talked about this a little bit in a previous conversation, but, do you see any discernible patterns in term of industries that are coming to the area as new entities in terms of concentration in any particular economic activity? This could be, perhaps, automotive, or perhaps, medical device, or do you see an “across the board’ diversity of manufacturing coming?

CBRE:

Well, definitely one of the leading industry sectors is the automotive industry in Ciudad Juarez. Juarez has had a very strong automotive presence for the last thirty plus years. We have a very solid base of automotive companies, and, with the boom in the automotive industry in the NAFTA countries and in the US, we’ve seen a lot of growth in that sector. In the last one, or two, years about a third of the activity in the market has been in the Mexican automotive sector. However, Juarez has a very diversified base of industries. So, we are also seeing activity in other sectors such as electronics, appliances and also the medical device industry. Its mainly automotive, but its very diverse in other sectors, as well.

Tecma Group of Companies:

It is a good thing to know that the industrial real-estate market in Ciudad Juarez is diverse. There is protection that comes from not being affected as much by ups and downs in specific industries. It seems that Ciudad Juarez, as opposed to other places in Mexico that may be heavily dependent on automotive, or, perhaps aerospace or medical device, Ciudad Juarez seems to have a well-diversified basket of investments. Would that be a correct way of looking at Ciudad Juarez as a locale with a developed manufacturing economy?

CBRE:

That is correct, and, of course, companies are attracted to Juarez because, over the past thirty or forty years, the labor has been trained in these different industries. So, there are jobs for all kinds of workers in different industries.

Tecma Group of Companies:

One of you two gentleman can hopefully address this question in a way that is not necessarily specific, but, if we are talking about range of price per square foot for space in industrial real-estate market in Ciudad Juarez, what would Class A space, Class B space and any other class of space cost in terms of ranges?

CBRE:

Well today, asking rates for Class A space, and, of course, Class A space is the best is the best in the market in terms of location and quality of construction. Today, Class A buildings have asking rates in the range of US $4.50 per square foot to US $5.00 per square foot. All of the lease rates that we will quote are quoted on a per square foot per year basis, and also on a triple net lease basis. That is the standard in the industry. Those are the the asking rates for Class A space.

Class B asking rates in the industrial real-estate market in Ciudad Juarez are in the range of US $4.00 to US $4.50, then Class C spaces are in the range of US $3.00 to US $4.00. It’s, of course, a wider range, because you can not only get a reasonably good C building, but, also, you can get a very bad C space. This is where the range is more open. Of course, the industrial real-estate market is like all goods and services, driven by supply and demand. As demand increases and supply increases, we have seen and we expect lease rates to continue to increase driven by supply and demand economics.

If I may add to that, this is Pedro, the average asking industrial lease rate, considering the same parameters that Andres just mentioned, the average asking lease rate across the city is US $4.27. That is across all asset classes. Now, this is significant considering that, two years ago, the average was US $4.00. Over the course of this time period, the industrial real-estate market in Ciudad Juarez has seen an escalation of twenty-seven cents. Over the course of 2014, we saw the largest growth in a year going back to the recession. That was close to four percent growth, year over year, when compared to 2013. Again, this is driven by a very active market.

Tecma Group of Companies:

It is obvious that things are tightening up a bit.

Without looking for specific percentages, but, in terms of a broad brush stroke, out of the available space in the industrial real-estate market in Ciudad Juarez, what would be the percentages associated with the A,B an C classes, respectively?

CBRE:

In terms of real numbers, today, we are tracking 5.4 million square feet of vacant space. Of this number, 1.4 million square feet is considered Class A. This is about twenty-five, or twenty-six percent of the market. Then there is 3 million square feet of Class B. That’s about fifty-five percent. Then there is 1 million of Class C space, which is about 19 percent. What has been interesting is that, in the past couple of years, a lot of Class A space has been absorbed. This is good news for the market, because the developers are realizing that the supply of Class A space is decreasing. As a result, we have seen three seen three new inventory buildings being constructed by three different developers. That is very good news for the market, because we are seeing new Class A inventory space being produced for the market.

Tecma Group of Companies:

That should result in somewhat of a price reduction in the industrial real-estate market in Ciudad Juarez?

CBRE:

If I may add to that, a lot of the new construction is going to materialize in build-to-suit activity. We might not see some of the downward pressure as some of those buildings are delivered occupied, as opposed to as speculative, which add to the vacancy rate. An interesting phenomenon that we are seeing here in the market is that a lot of the times, we are seeing speculative construction deployed that eventually gets leased up as it is being constructed, or soon after, we have some sort of examples of this happening in 2014. This shows that demand is outpacing new construction. We are very excited about this, and hopefully it drives further investment to the city.

Tecma Group of Companies:
That is the kind of thing that shelter service providers like Tecma love to hear. Thank you for that good news.

We have looked at a recap of the 2014 situation. Absorption is up from 2013. There is a diversity of industry coming into the city, which is good, from the point of view of economic stability. Given the positive developments in 2014, when compared to 2013, what have you seen in January and what do you expect to see in the remainder of 2015?

CBRE:

We are forecasting a very activity year. One of the things that Pedro tracks here in our office is our users in the market. These are companies that we are aware are looking at space out in the market. These are not companies that have bought or leaded any space in the industrial real-estate market in Ciudad Juarez. They are just looking. We are tracking a total 3.6 million square feet of users in the market, so that’s a lot of companies looking for space. If you look at it, basically, that is very close to the available A and B spaces. Again, as you said, this is just the beginning of February. We are forecasting a very active 2015 in terms of both users looking for space and, as we were mentioning a few minutes ago, in terms of developers building new inventory or speculative construction.

Speaking about the diversity that we were discussing a couple of minutes ago, the users that we are tracking in the market include a couple of medical device companies, automotive companies, transportation, and electronics. Again, we have a very healthy and diverse mix of users out there looking for space.

Tecma Group of Companies:

It’s great to hear that. We have listeners of the podcast that, after hearing, have questions to ask. So, apparently, the information is useful. In this podcast, we have just barely touched upon the specifics of the industrial real-estate market in Ciudad Juarez. How could listeners contact either one, or both of you, at CBRE with further questions in order to get into more specific items with respect to this topic?

CBRE:

Of course, this is Pedro. If somebody has specific questions, or a follow-up, they can shoot me an email. My direct email is pedro.nino@cbre.com. Interested parties can find all of our reports, and our research data, if they navigate www.cbre.com website.

Tecma Group of Companies:

We want to thank both of you gentlemen for coming in here, and giving us some of your valuable time to explain to the listeners what is happening in the industrial real-estate market in Ciudad Juarez. We hope that everything goes as you have forecasted during 2015, and would like to invite you back for the beginning of 2016 to have a review to see if expectations ended up matching reality. Would that be possible?

CBRE:

Of course, we appreciate the invitation, and we look forward to continuing this discussion late this year or early next. Thank you again for the invitation.

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