Prologis L.A. President Sees Mexico as Growth Center

Looks toward peso stability, Mexico over China

While the bulls and the bears do their thing on Wall Street and the peso bounces versus the dollar, commercial real estate may serve as the constant for the longer-term positive business prospects in Mexico. For Luis Gutierrez, Prologis president for Latin America, several areas in Mexico show promise in the logistics and manufacturing markets.

Gutierrez offered those views and a look at other factors during this interview with Mexico Now.

You have the responsibility for the latin american region. You build. You lease. You get the land, whatever, in real estate. What are the trends you are seeing in the type of buildings that customers want in 2011 and for which they are planning during the rest of the decade?

Luis Gutierrez, President Latin America, Prologis: There are two types of customers, one relates to logistics and the other one refer to manufacturing — that depends on the profile of the customers.

I would say on the logistics side, customers are looking for a building that is flexible, can accommodate expansion and shrinking needs. That means a center building with the right columns facings so the forklifts can be accommodated in an efficient way to accommodate their layout. They are looking for a floor that is flat. We don’t want to have any problems with the floors.

They are looking for height, ten meters at least on the low side. They are looking for a lot of truck space for the boxes and good maneuvering area. What is different is security. They are looking for state-of-the-art systems that register vehicles coming in and coming out with technology that allows only registered vehicles to come in and come out.

They are looking for great service security wise, so that you have a company that would be reliable. They are looking for price, especially the logistic providers. The margins become very thin. Of course in times of crisis the logistic providers gain market share, they consolidate a lot of operations, so that business is very tight, price is a big issue.

You are saying price is a big issue, one of the things we are seeing out there, the markets are very volatile. Yet you talk long term. How is, the real estate industry, the industrial real estate industry in mexico, affected by this near term financial turmoil versus the long-term business need?

It does affect us. Recessions with an initial trend which is financial markets, sometimes that volatility does not get transmitted to the real economy, sometimes it does. If that volatility begins to be long enough or if that volatility affects the financial system, in which the flow of money being affected because the banks cannot trust themselves, then that begins to affect the real economy and the consumer.

Today we have seen a slight recovery in Mexico, basically more on the infield markets which relate more to the consumer and less in the border because of the perception of an insecure border. So I would say that it is still too early to tell if this recent volatility will affect the real economy. There have been projections that have been lowering GDP growth for Mexico and the U.S. If the U.S. manufacturing gets affected, of course it is going to lower the amount of interest of space in Mexico.

The peso has had a rough summer versus the U.S. dollar. When a situation happens with the currency somebody wins and somebody loses. From your real estate viewpoint in Mexico, with the peso dropping, who is winning and for whom does this represent a better deal, at least now?

My thought is that is going to be a short term situation, so we need to think about what is going to be the more stable level. We saw the peso rise to about 15 two years ago then it went down to 11.50 and now we are at about 14 so my belief is that 14 is not a sustainable level because I believe this is just a volatility issue with the markets.

People are looking for safety and they are buying the dollar so they are selling the peso and buying the dollar. I think Mexico has a stable economic situation and eventually once the markets get into a more reasonable mindset, I think the peso will go down. I don’t know to what levels, it would be good for Mexico if the peso stays between 12.50 and 13, which I think is what is going to be the level of the peso going forward.

And at a level of 12.50 to 13, I think Mexico would be very competitive to China and would be very competitive to the U.S. Maybe at that level Mexican labor would be very productive and a very good answer for productivity for companies to come down to Mexico.

You think this is a very short term situation with the peso, let’s take a look at the longer term. As president for Prologis in Latin America, what do you see as the outlook for industrial and distribution real estate in Mexico?

I think in Brazil and Mexico, I see a very positive outlook. Being a global company we are able to analyze different trends around the globe. What is driving real estate needs in Mexico and Brazil, we’re building our stock. So in comparison to the population we have proportionately less stock (inventory) of warehouses, the other thing we have is a young population in comparison to others and we have the demographics in both countries, Mexico and Brazil.

That means the population is not going to shrink, it is growing. Most of the population that are young will be of working age, that should mean higher levels of consumption, higher levels of income and this would mean more demand for our product.

In Brazil the need is even higher because in terms of availability of state-of-the-art warehousing is 10 years behind Mexico, they have Sao Paulo is a city of 21 million people, the amount of real estate stock there is very low and all of the multi-national companies that are already operating here are already starting to grow their business.

With Mexico, there are different regions. We use the word cluster, for example; Juarez more automotive, Bajio more aeronautics, for examples. You have property all over Mexico. Where is the demand growing in the different regions?

We have six sub-markets in Mexico. We have divided them into two categories, logistics markets and the manufacturing markets. The logistics markets are, Mexico City, Guadalajara and Monterrey, because there are big concentrations of population in Mexico, those markets are growing. Vacancies have come down to a level to where it’s already making sense to develop new properties and rents have come up.

Rental rates came down in the crisis, now they have trended up, making it feasible to begin to develop. Mexico City would be number one, it’s probably between there and Monterrey where you have the high absorption of space and Guadalajara although at a slower pace. But Guadalajara is also showing good signs. Monterrey has the advantage of a demand that is mixed of manufacturing and logistics, so Monterrey in spite of the violence perception has a lot of interest and the numbers of last year and this year have been very positive.

Those are the three markets where we are investing, where we are building new buildings and we are expanding through development.

How do you view the industrial/manufacturing and the logistics-related real estate markets in Ciudad Juarez?

As for Juarez, we see the market being stable, year to date. Rental rates are also stable but flat. We still continue to see more expansions of existing companies versus new companies looking to enter the market. Overall this is good since it shows that existing companies are growing and hiring additional labor. They feel safe and continue to invest in this market. Both the automotive and medical industries are currently the two most active industries looking for space. Vacancy percentage will continue to be skewed since there is quite a bit of second-generation space that will take several more years to lease.

As far as manufacturing and logistics, Juarez continues to be mostly manufacturing, but we are seeing more companies looking at outsourcing their 3PL requirements.

This is good since it shows that the companies are willing to have warehousing operations in Juarez versus El Paso. Also, by extracting their warehousing operations from their existing buildings, these companies have more space for manufacturing.

Companies can warehouse raw materials in Juarez and minimize risk in border crossing time and ensure access to raw materials 24/7. They can then warehouse finished product, if needed, in Juarez then and ship directly to customer.

You talk about the different regions, let’s take a look at the industrial sectors either in those regions or where you are seeing the most activity. what industries demand the most from you?

The industry that relates to the consumer, so they are mainly the logistics providers. The DHL, the Excels of the world, they are growing their business a lot.

What about those that make products such as automotive and electronics?

The auto industry has been growing a lot, in the industry we have seen a lot of our auto tenants grow, we have seen our electronic related tenants grow, white goods, medical and aerospace in our portfolio have been growing.

Earlier this year the big news for Prologis was the merger with amb. If i am your customer, what’s the value proposition for me because you merged with another leader in real estate? How do i win as a customer?

One of the things through which we try to distinguish ourselves, is our service to our client base. That is done through different things, first the quality of our product and the consistency. So if you are a global company you will be able to get the same warehouse with a Prologis development, which are normally, probably, the best in the market.

You will get the same service around the world. We would be your real estate solution in Brazil, in China, in Mexico, in Canada, in Spain. Wherever you have your business you have one-stop shopping. We’re able to do that. You want to get terms, same policy and same kind of contract. You of course benefit from scale because our insurance cost is lower, because our cost of construction is lower because of the volume. That is a lot of what we have to offer tenants.

How are the capital markets affecting you? What’s happening in terms of capital markets in Mexico and the U.S. affecting industrial developers in Mexico?

Capital markets have benefits of some things because we have been able to lock that at very low rates, as treasuries have come down to very low levels. We have been able to secure that at historic low terms. That is a positive aspect of having a very low interest rate. If we have very low interest rates then we are able to lock in a lower cost of debt. In terms of equities, as I said, depending on the volatility of the capital markets we will see how the consumer demand is affecting the real economy.

What then becomes of the general trends you are seeing in pricing and in cap rates in the industrial real estate market in Mexico? What are you seeing at this point?

We’ve seen a decrease in cap rates, I’m not factoring in the current volatility, we saw cap rates peak in 2007. They came down maybe between 250 maybe 300 basis points by 2009 and we believe those cap rates have come back at least between 150 and 200 basis points depending on the market. The logistic markets have had a better recovery than the border markets.

You are in all these countries; you have to deal with the governments of all these countries. In Mexico what can the government do to better support the industrial development they say they need?

There are several roles that they play and of course this is a very big question because the government has three levels, federal, state and municipal. The thing that can be more direct is in expediting all the permits and authorizations that we need to do our development, to have a quick response for our clients and to have our parts ready to invest.

Sometimes there is a lot of bureaucracy and we want to put more money and create jobs but we can’t do that because the government won’t allow us on a timely basis and there are a lot of strategic decisions that relate to our business and to the public policies.

How does violence in Mexico affect your industry?

Violence is in the perception of a lot of people around the world. There is a disconnection of perception and reality. We’ve seen our business grow. We’ve seen the Mexican economy grow.

We’ve started construction in our main logistic markets. We are seeing a lot of the consumer companies grow their business. We are seeing a lot of manufacturing taking advantage of our qualified and good price labor. There are a lot of good trends going on.

People perceive that the situation is worse than it really is. We need to go out and sell Mexico a little bit better because Mexico is coming into a trend in which we will compete much better with China and we will see a lot of companies now coming to Mexico and not going to China.

What are the benchmarks we need to watch for during 2012 when it comes to keeping an eye out for in the industrial real estate sector in Mexico? What do we need to watch in order to see success in your industry?

We need to have a stable economy. We need to have a situation in the political arena that doesn’t get out of hand so that people perceive that it is stable. I think the government has a big role in that.