Trade Wars

Take-off of industrial development in the border region

Comment:

The inflation we see directly is the result of pent-up demand not being met by supply, due to factors such as increased consumer spending and disruption to supply chains. The industrial rental market for lean manufacturing and warehousing in the Borderplex region (El Paso, Juarez, southern New Mexico) is a microcosm of this phenomenon. I was recently able to attend a few briefings from Christian Perez Giese, Senior Vice President/Director of Industry and Logistics for the Borderplex branch of commercial real estate services firm CBRE, and garnered some Lots of current information about industrial space in the Borderplex.

Speculative space, often referred to as “spec” space, is industrial space that a developer builds without necessarily having a contract with a tenant. The space is built on the speculation that upon completion of the space, or shortly thereafter, the developer will recruit one or more tenants to lease the space. The availability of a specific space allows developers and communities to offer products available to companies that need to rent space at a relatively short time. In many cases, a company cannot wait the nine to twelve months it takes to build new industrial space and contracts are lost.

In Juarez, there is approximately 75 million square feet of industrial space, and active users are currently requesting an additional 3.6 million square feet. Juarez has seen Asian companies set up production operations to hedge their risk against supply chain disruptions, trade wars and rising logistics costs. Large Taiwanese companies have established new operations in Juarez or expanded their existing operations. About four million square feet were absorbed in Juarez in 2021, and another 800,000 square feet were absorbed in the first quarter of 2022, the second highest absorption on record in a quarter.

Currently, the vacancy rate for industrial space in Juarez is 0.7%, which is an all-time low. More than 5.5 million square feet of industrial space are currently under construction, including three million specific spaces. If all the spec space were available today, vacancy rates would only increase to 2.7%, which is still well below typical market equilibrium. This construction activity is a good leading indicator of upcoming demand in El Paso, Texas, and Santa Teresa, New Mexico. Historically, industrial rental rates have been similar across the border in the Borderplex. However, Juarez has been undervalued for six to nine months, and rental rates are quickly catching up with those across the border. Average asking rental rates in Juarez can now exceed $6.00 per square foot.

There are currently 63 million square feet of industrial space on the US side of the Borderplex. Over four million square feet of space was absorbed in 2021. In the first quarter of 2022, approximately another million square feet of industrial space was absorbed, which was a new record. According to CBRE, the vacancy rate in the El Paso area is currently at 1.5%. Brokers believe it could actually be as low as 0.5%, taking into account that some of the available space is functionally outdated.

Currently, there are 2.7 million square feet of specific space under construction, of which 1.5 million square feet are scheduled for delivery in 2022. Of the total new specific space, 983,000 square feet are already leased or have a letter of intent in place. Currently, 2.8 million square feet of space is requested by active users. Warehousing represents the majority of this demand. Transportation, logistics, and third-party logistics companies account for more than 80% of recent rental activity. In Santa Teresa, New Mexico, and San Jeronimo, Chihuahua (immediately across the border), over 2.1 million square feet of space is under construction, including 635,000 square feet of specific space . Rental rates for some spaces can now exceed $7.00 per square foot.

It could be a few years before the supply of specific space catches up with demand to return to what would be considered a normal market vacancy rate. If current market trends continue, the Borderplex area could face another 30% increase in rental rates by 2025. According to Perez Giese, “a lot of land is being sold to new developers entering the market , new spaces will therefore be built. Demand for industrial land has pushed prices to unprecedented levels in east El Paso. However, the Borderplex still has some of the best industrial land in the West, with prices well below other competitive markets. The development boom is pushing growth east to Horizon City (far east of El Paso) and west to Santa Teresa, New Mexico.

“Despite rising land prices and rents, the cost of living and operating industrial buildings in the Borderplex is still relatively low, which is to its advantage. In the future, we should see more manufacturing entering the region that is not necessarily tied to Mexico,” says Perez Giese.

This is the first of a two-part series on industrial growth in the Borderplex region. Next column: Challenges to industrial growth in the Borderplex region.