Where are the opportunities and what are the risks?

Transcription

1 The Northwest Mexico Commercial Real Estate Markets Where are the opportunities and what are the risks? September 2012 Economy When the US sneezes- the old saying goes Mexico catches a cold. After Mexico caught bird flu, was ravaged by a drug war, was priced out of low end manufacturing by China, and witnessed the decimation of its biggest export market, Northwest Mexico s real estate market is actually in pretty good condition. All markets seem to have bottomed out and are on the rebound. Many investors are on the sideline pending the US elections, and the effects of the government change back to PRI leadership in Mexico. Users however, in the aerospace, medical, packaging, printing, furniture and auto industries are expanding. Why? Well for one, its nascent Mexican mortgage market is not big enough for the US real estate debt bubble to affect the majority of its working people. Mexico s lower government debt rate, (43% vs. 103% of GDP for the US) bodes well for the future value of the peso as well. Baja California coastal areas, Cancun and other tourist markets were overheated by Americans with no- doc loans putting down 6 figure deposits at lavish parties in downtown San Diego for ocean front condos. Baja Ocean view condo boom and bust: Thirty separate condo complexes were started in the mid 2000 s along the beautiful, formerly peaceful coast between Tijuana, Rosarito and Ensenada. The beautifully rendered Trump Towers, which were never built, give us an illustrative example. Buyers, without bothering to look at the site, paid out upwards to 30% in deposits totaling $32 Million on 122 condos ranging from $300,000 to $3 Million. If the

2 gullible investors had bothered to check, they would have found the property is 400 yards from the primary settling ponds of Tijuana s sewage treatment plant. Morning offshore winds carry a stench right to the penthouse. Why do North Americans, who would never buy property sight unseen, or put property in a straw buyers name in the US, seem to fall for all kinds of scams in Mexico? I am not sure, but I can advise you how to avoid most common pitfalls. Hire an independent agent or lawyer that knows the market and does not work for the seller. If the Trump buyers had gathered information from an independent source they would have gotten the real scoop on the poop, but instead they used the attorney of the seller to draw up the papers and put down payments into escrow at a champagne catered event with Ivanka Trump s word that the site was going to be the best of the best. 1 The property is now for sale with a very nice sales office and a hole. There are many bankrupt and bank owned condo shells along the coast that are deteriorating for lack of demand. Adventuresome investors could pick up property for a significant discount on construction. Demand will return as the reputation for drug violence subsides, and baby boomers look for less expensive retirement communities close to Southern California. Some nearly finished bank owned towers are available for a fraction of the original cost. Financing is the big issue, as it has been for so many years. But well- heeled Mexican families with little debt will buy up the best options and will return condos to the market at prices around ½ of the 2007 prices. Aging baby boomers will return to enjoy ocean- view living, with low cost help, as prices return to normal in the US. Development surrounding the Valle de Guadalupe wine country, including vineyards, hotels and restaurants are attracting new investments as vintners come to market with Mexico s best wines. New wines are getting international acclaim and the coastal hills are attracting European investors. The timing may be a bit premature, as the long border waits and the perception of insecurity will persist and many people that formerly flocked to Newport for lobster on any given weekend are staying closer to home. The Maquila Market The export oriented maquiladora market had already been buffeted by the Far East competition, (China, Viet Nam and others) with labor costs as low as $0.15/hour vs. Baja s $1.50/Hour. One recent client told us that he is hiring college graduate programmers in the Philippines for $6/day. Even with overseas shipping times and costs, Mexico could not compete. 1 trump7

3 Thomson, Mitsubishi, Lucky Goldstar, Sanyo, Hitachi, Toshiba and others had invested heavily in the big screen CRT business, which, almost overnight, was killed by Plasma and LCD technology. Aggressive moves by Mexico s commerce secretary exacerbated the situation with countervailing duties on electronic components from China that were unavailable in the Americas, reducing the value of the tariff advantage of duty free North American Free Trade Agreement (NAFTA). Tijuana Tijuana Industrial Buildings over 91,000 SF by Grade 258, ,140 1,456,162 1,746,792 a b c d f 1,274,703 Total SF available over 91,000 SF = source: Maquila Properties European market issues are causing some problems in the market here as a reduction in German solar subsidies, caused Unisola to shut down its showpiece 300,000 SF plant in Nordika Industrial park in Tijuana. The sale of Sony s pioneering 600,000 SF assembly plant to Foxconn has also caused some of Sony s suppliers to be forced out of business. One plastic molder will soon release over 300,000 SF into the market. Consolidation continues in the consumer electronics fields as Panasonic digests the purchase of SANYO.

4 Inzi A Korean display company constructs a new plant in El Florido. Bright spots include continued demand for Class A space as companies consolidate into formerly Over $0.40/SF/Month space for less than the cost of their escalated class B rents. The low rents are over in Mesa de Otay however, as Mitsubishi Chemical and a Canadian Packaging company absorb 360,000 SF in two Class A buildings (not yet on the chart below). The Class A rates are back to over $0.40 per SF per month NNN, after a 3 year tumble down to below $0.35. The graph below shows the Net absorption for the first half of It illustrates how older buildings are being vacated for newer buildings. The net absorption rate will likely drop significantly in the 3 rd quarter, perhaps into negative territory for the first time in 2 years. Plantronics, who bought the old diaper manufacturing building owned by Covidien, and which shows up as over ½ of the class B positive absorption in the graph below, moves out of over 400,000 SF of class A and B space in FINSA s Parque Industrial Tijuana and Verde s Class A distribution building on Boulevard Bellas Artes. Unisola and the plastic molder mentioned above will add another 600,000 SF to the market as well.

5 500,000 Net Absorption By Class 400, , , ,000 Net Absorption By Class 0-100,000 Class A Class B Class C - 200,000 Quarter 1 and 2 Tijuana industrial real estate absorption. Source CBRE and Maquila Properties, Inc. Tijuana is growing rapidly and is restricted to growth to the south and east by the US and Pacific Ocean. A new sustainable city is master planned in the Valle de Las Palmas area. There is already an established university, and thousands of new housing units. This may be the site for an auto plant or other large employer soon and represents a possibly rewarding investment opportunity to land bank, or develop commercially. Mexicali Tijuana is the largest market in Baja, but Mexicali is stable and growing, especially in heavier industrial manufacturing due to lower cost land, rail availability and more stable labor force, although it has higher costs during the summer months due to air conditioning costs. The Mexicali industrial real estate market has been very closely held by a handful of families with strong political roots in the valley. They have been successful in excluding many developers, including US REITS from establishing footholds in the market. Corporate Properties of the Americas (CPA) is an exception that bought out EX 21 industrial park. Silicon Border and Cambridge also have holdings in the market. The approximately 28 million SF market is considered a secondary market and has not been targeted by FINSA, Prologis, Verde, Vesta or Prudential.

6 2.8 Million SF Available 8% 39% 13% 9% 11% 12% 5% GRUPO IAMSA GRUPO NELSON GRUPO PIMSA C.P.A. GRUPO MARAN INTERMEX / CUCAPA P. IND. CALAFIA DESARR. DE ACTIVOS OTRAS NAVES 1% 2% Mid year 2012 Mexicali Industrial Vacancy, Source, Maquila Properties, Inc. and Dessarollo Industrial de Mexicali. Vacancy as of August 2012 totaled approximately 2.8 million SF or 10% of the market, with 39% of the available space owned by manufacturers who have shut down plants and have not yet found buyers. Videocon (formerly Thomson) for example, an Indian company that owns the largest building in the region has about 350,000 SF available of the 973,000 SF building Thomson built for TV production seven years ago. The rest is leased or being used for minor production net absorption totaled approximately 750,000 SF, which represents about a 3% growth rate in the market and about 25% of the available inventory. Existing plants growing in the market have comprised ¾ of the net absorption. There has only been 150,000 SF built to suit in the last 6 months for a TV plant in the Nicoya industrial park. Average asking rates for Class A buildings has dropped from $0.38/SF NNN at its peak 5 years ago to around $0.32/SF. Some landlords are paying property taxes instead of charging the tenants as well. With about 4 years of net absorption in inventory, we expect that the rates will start to climb again, and new buildings will start to be built once the overhang is absorbed. LG electronics, Sun Power and other Asian firms are now establishing operations in Mexicali, as well as some huge industrial users, that cannot be accommodated in Tijuana or in the US.

7 Ensenada This cool Pacific bay with over 600,000 inhabitants is only 60 miles form Tijuana but a world apart. Ensenada is the only deep water port in Baja California directly linked with the Mexican cities of La Paz, Manzanillo, Mazatlán, Acapulco and Lázaro Cárdenas, as well as the U.S. cities of San Diego, Long Beach and Los Angeles, the Guatemalan city of Puerto Quetzal, the Chilean city of Valparaíso, the Japanese city of Yokohama and the Chinese city of Hong Kong. The northern part of the city has an industrial port area called El Sauzal, which has much vacancy after several large companies. Leviton left 72,000 SF at and Ingersoll Rand (IRCO) left two building totaling another 66,000 SF. Corrugados (OC Container) left another sq ft. at El Sauzal. On a positive note, Sofftek leased 27,000 SF for about $0.22 / SF/ Month, taking advantage of the highly educated local workforce. The area is dominated by fishing and port operations. San Luis Rio Colorado This small desert market is primed for growth with buildings recently selling for as low as $12/SF. An abundant work force, access to US power supplies, low cost flat land and a new border crossing, plus the Sonoran government s more generous incentives for large employers is driving some of our clients in this direction. Bose is the biggest manufacturer left now that Lee Jeans shuttered its operations.

8 Tecate This small market is perfect for the ranchero looking for a quiet small town right on the border with Eastern San Diego, with some rail served sites. Mountain roads and cooler winters and hotter summers than Tijuana, attract some clients. You can see the mayor in the zocolo most days, and many companies, like Schlage Lock (Ingersol Rand) have been working there for decades. The largest building available is the former Snapple facility with 170,000 SF. Rosarito If you dream of looking out over the ocean while working, Rosarito, home of Sharp, Pemex, and many small woodworking companies may be right for you. Kia is rumored to have plans for an auto Assembly plant. A newer 300,000 SF former KOJO plant is available. Cool ocean breezes and a well- educated, bi- lingual workforce will attract more companies in the future. Where to invest now In conclusion, the best market opportunities are in Tijuana, which was the most beat up industrial market. Buy Class B space for less than 65% of replacement cost, refurbish and price under the class A market, with good infrastructure in place and expect high returns once the market regains its footing. Murder rates and other signs of the drug war are way down, in spite of the perceptions. The proximity to San Diego, the availability of trained personnel, and possible peso devaluation (which increases demand for industrial real estate because of lower labor and energy costs) will absorb the remaining hangover inventory over the next 2-3 years and rents will skyrocket. We are already seeing big rises in rents in Otay, where few large spaces are available and big players, like Flextronics, Autoliv and a Korean car company are actively searching for space. Another contrarian play is to purchase almost finished Rosarito condo towers for 50% or less of replacement costs and sell to the baby boomers their dream beach house, in a place that they can get very inexpensive help as they age, but still have easy access for their families, and a quick trip to their US doctor or family. This market, however, may take a while to return. Jean- Paul de Kervor President, Maquila Properties, Inc. Jean- Paul (JP) de Kervor has family roots in Baja California going back to the 1800s with the French Copper Mines in Santa Rosalia called El Boleo. He holds a degree in Chemistry and an Mba in International Business from SDSU. He has been doing business in Mexico since He has founded travel businesses, chemical companies and shelter operations as well as the real estate offices for Colliers and

9 John Burnham & Company in Baja California. He is focused on representing start- up companies establishing operations in California and Baja and has been recognized By DEITAC (Tijuana Industrial development Commission) as a top producer several times. He has been published in El Financiero, The Twin Plant News, speaks at conferences and teaches courses at USD and UCSD Extension. He is a long time supporter and member of the WMTA, DEITAC. Please feel free to contact him about your Mexican start- up or real estate needs at or