Demand For Industrial Real Estate Remains Robust in U.S.-Mexico Border Region
Demand For Industrial Real Estate Remains Robust
in U.S.-Mexico Border Region
Article Via: CoStar
The manufacturing supply chain in the area is pumping out billions of dollars worth of products and foreign exports that are driving up the need for warehouses on both sides of the border, the reports outline.
One report from the San Diego Regional Economic Development Corp. (EDC) and the University of California San Diego noted that the area has become the world's largest medical device manufacturing cluster. That is increasing demand for industrial real estate from makers of medical and biotech-related devices such as Becton Dickinson and Thermo Fisher Scientific, which in recent years have enlarged their industrial presence in the cross-border region that includes the Mexican state of Baja California, along with San Diego and Imperial Counties on the U.S. side.
Also active in the border region are industrial users including manufacturers of audio and video equipment, semiconductors, aerospace parts and plastic goods.
In total, the manufacturing supply chain within the combined region, known informally as Cali Baja, produces $2.5 billion of products annually. That region accounts for $24.3 billion in foreign exports, and trade with Mexico supports more than 566,000 California jobs, the report notes.
Mexico’s Tijuana market has been getting a large share of the mega-region’s new industrial projects due to factors including rising costs and longer approval processes on the U.S. side. A report from Los Angeles real estate brokerage CBRE Group Inc. notes that the region added 800,000 square feet of new industrial inventory during the second quarter, while maintaining that market’s industrial vacancy rate at a historically low 3.6 percent.
At mid-year, Tijuana had an additional 1.8 million square feet under construction, about one-third of which was pre-leased. CBRE cited industrial survey findings from the Mexican data firm Solili, indicating 70 percent of respondents in Tijuana increased demand during the second quarter and 50 percent projected higher demand over the next six months.
With spaces in Tijuana filling up, demand is gradually rising in Baja California industrial markets further to the east, such as Tecate and Mexicali.
In past cycles, observers noted, there has been a maquiladora or “twin plant” set-up, where firms set up operations on both sides of the border to, for instance, handle manufacturing with a lower-cost labor force on the Mexico side and distribution or final assembly on the U.S. side. That dynamic remains, though to a lesser extent than seen during the 1980s and 1990s when it was booming.
“It depends greatly on what the manufacturing operation is and to where they ship the finished product, as well as where they receive raw materials or sub-assembly parts,” said CBRE Senior Vice President Joe Smith in downtown San Diego, in an email.
Even as the market remains strong now, it could change if trade policies do. The report by the Economic Development Corp. and university researchers added that disruptions to the cross-border economy – including those that might result from trade agreement or tariff changes – could disrupt a manufacturing sector that directly employs more than 418,000 workers on both sides of the border.
Still, there's possibility of continued demand outside of trade-reliant business. Smith noted that Otay Mesa, San Diego’s key border-adjacent manufacturing and logistics submarket, in recent years has become less reliant on cross-border business and has grown its local profile as the “low-cost alternative” for users within San Diego County. Otay Mesa’s rents and land costs remain generally lower than rates for corresponding sites in places like central San Diego and North County.
“It is important to point out that South San Diego County is still the home of the least expensive housing opportunities,” Smith said. “It would seem logical that Otay Mesa will continue to be the focus of additional manufacturing and back-office growth in the coming years.”
South County communities, especially nearby Chula Vista, have recently seen a rise in completions of new apartments and single-family homes, generally priced lower than in other parts of San Diego County to the north. That housing, other observers have said, is already prompting firms to consider Otay Mesa for their industrial operations, at least more so than they would have just a few years ago.
“Corporate entities will figure out that it may make more sense to locate employment opportunities in areas that are more convenient to the workers than for the bosses,” Smith said.
For now, mid-year numbers from CoStar Market Analytics paint a picture of a generally healthy industrial climate for Otay Mesa, with new construction limited to a few speculative projects. The amount of new industrial space under construction as of mid-year in Otay Mesa – at 591,000 square feet – is only about one-third of what was underway on the Tijuana side of the border.
The Otay Mesa submarket’s vacancy rate is 7 percent, higher than the overall San Diego region’s 4.5 percent, but still historically low. Its annual rent growth of 7.2 percent tops the region-wide 5.5 percent rate as of mid-2018. Today, the average Otay per-square-foot monthly rate is 77 cents, well below the San Diego regional average of $1.24.
Investors are betting on the continued growth of market. Otay Mesa’s industrial property purchase volume during the past 12 months was $122 million, up 74 percent from the prior year. Meanwhile, San Diego County as a whole saw deal volume drop by 10.8 percent, though it still hit a strong $1.6 billion.
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