The power behind Mexico’s Industrial Development
A kaleidoscope of idiosyncrasies
There is no deal without trust
By Sergio L. Ornelas, MEXICONOW Editor
It’s nice to see that many cities in Mexico boast modern industrial and logistics facilities. While the untrained eye may take them for granted, there are huge doses of history and effort behind those large and unassuming buildings.
Under those roofs, every day and frequently around the clock, millions of workers tend to their cores of assembling, manufacturing and shipping products for the local and export markets.
On the heels of automotive, electronics, medical and aerospace manufacturers among other industries, Mexico is now renowned for its global competitiveness and export powerhouse status. And new, higher-end operations such as logistics, customer service and engineering centers are on the rise.
And while Mexico still has many deficiencies and problems that would take the rest of this editorial space to discuss, the country is at the threshold of a unique opportunity to significantly improve employment and the quality of life of many Mexicans by continuing to grow its industrial base.
But behind those industrial buildings, there is a more humane, entrepreneurial and compelling story. It is about the private industrial promoters and a few good men in public office that actually created and have sustained the proper conditions for industrial development in Mexico.
Coincidentally, most of those individuals happen to be involved in the real estate business. Consequently, this article is a tale of industrial buildings and promoters, the people behind the success of Mexico’s industrial development.
The early years
Even though industry has been present in Mexico since the 1930’s, we can trace the birth of Mexico’s modern industrial sector back to 1964, when the first maquiladoras and industrial parks began in the Northern border cities.
In order to provide employment for 500,000 Mexicans whose visas to work in US agricultural fields were suddenly cancelled, as well as to improve the appearance and quality of life of Mexican border communities, and based on a production sharing study by Arthur D. Little’s Richard Bolin commissioned by Juarez entrepreneurs led by Jaime Bermudez, the maquiladora program was officially established in June 1966.
Jack Williams, a former GM plant manager in Juarez recalled: “At that time General Motors did not go offshore at all. It was hard to deal with labor unions in the U.S. if you wanted to relocate to Mexico. But US$50 – 60,000 savings per job was an attractive proposition. Our corporate group in Ohio communicated with labor representatives and explained that United Auto Workers wages were too high to be competitive in the global marketplace and that off-shoring work to Mexico in labor intensive operations would actually help us conserve jobs in the US.”
In the early years, Jaime Bermudez founded the first industrial park with RCA as the anchor tenant, Dick Campbell of Nogales developed the first “Shelter” program, Enrique Mier from Tijuana was a pioneer subcontractor and Sergio Arguelles of Matamoros developed the supplier park concept with GM.
The growing years during the 70’s and 80’s were boosted by the auto and electronics industries. After the 1982 devaluation of the peso the industry enjoyed a “Boom decade” which was further fueled by the creation of NAFTA.
By the early 90’s, Mexico’s success in industrial real estate was well known globally and more players joined in led by international brokerage groups and GE Capital. A few years later, other investors followed including U.S. Real Estate Investment Trusts (REITs), insurance groups, pension funds and other capital and equity investors.
At the turn of the century, the large foreign investors started to increase their positions in industrial real estate by acquiring property from the Mexican developers and forming strategic alliances with them for further growth, some of them were: The associations of FINSA with AIG and GE; Prudential with Amistad and O’Donnell; AMB and Prologis with G-Accion; Calpers with Vesta and Kimco with American Industries among the most notorious ones.
In recent years, the ownership consolidation of properties gravitated rapidly into the hands of the large players, setting the stage for the latest and most dynamic chapter in Mexico’s industrial real estate market with the formation of the “FIBRAS” (Mexico’s REITs by their acronym in Spanish) in 2011.
Today, the FIBRAS of Prologis, Terrafina (Prudential), Macquarie and Fibra UNO lead Mexico’s industrial real estate equity market as shown in Exhibit #1 by the size of their property portfolios.
THE MARKET in 2013
For our discussion, we will define the universe of industrial buildings as “THE MARKET”. This includes all leased and owned facilities zoned and used for manufacturing, assembly, logistics, R&D, engineering and business process (“Call centers”, “Back-office”) operations.
The buildings may be old (Type “C”), new and efficient (Type “A”) or in between (Type “B”), and they may be located in an industrial park or on “stand-alone” sites. Although most buildings are occupied,THE MARKET also includes those buildings that are vacant.
THE MARKET is a great tool to forecast the economic wellbeing of a country, a region or a particular city. For example, in an economic upswing, lease contracts and construction permits are known well in advance of the arrival of equipment or the actual creation of jobs; and in a downswing, a “For lease” or “For sale” sign outside a factory is not a good omen for the workers or the community.
At the end of 2014, THE MARKET had approximately 671 million square feet of roofed space (62.3 million square meters) throughout Mexico. This represents an increase of 3.5% over 2013. In comparison, the annual growth rates were 2.4% and 2.2% in 2013 and 2012, respectively.
Unlike the general economy in Mexico, which struggled to grow for a second year in a row posting a disappointing GDP growth rate of 2.2% in 2014, THE MARKET had an extraordinary good year. In terms of new construction, THE MARKET added about 23 million square feet of space on the heels of the auto industry in the Bajio region and Puebla, distribution facilities in Mexico City, and medical, electronics and auto parts facilities in most border cities.
Propelled by the growing demand for goods and expanded manufacturing activity in the U.S. during 2014 that boosted Mexican exports, THE MARKETdid great in general but had regional mixed results in Mexico. This is evidenced by the main performance indicators of the major metro area sub-markets.
Please see Exhibit #2 for “Gross Absorption” andExhibit #3 for “Vacancy Rates” of the main selected submarkets in Mexico for the period of 2009-2014.
In 2014, Monterrey improved its performance nicely posting 4.7 million square feet (MMft2) of gross absorption versus 4.1 MMft2 in 2013 and at the same time it reduced the vacancy rate to 8.3% from 9.8% in the prior year. Large projects by Kimberly Clark, Walmart, Soriana, Vitro and Nifco Japan among others kept the Monterrey market on a roll.
Ciudad Juarez, the third top sub-market in Mexico con-tinues to enjoy a frank recovery with gross absorption at 2.3 MMft2 and over 30 transactions including those of Bombardier Recreational Products, Yazaki, Flextronics, Keytronic and Furukawa. Crime is not an issue anymore in Juarez and companies are taking advantage of the highly competitive wages and logistics costs at the”Borderplex”. Industrial buildings’ rents are also very competitive since there are still about 8.9 MMft2 available as reflected by the vacancy rate of 14.4%.
The Tijuana Metro Area’s gross absorption of 1.9 MMft2 in 2014 shows a slow but steady recovery which has brought down the vacancy rate from 17.5% in 2009 to the current 10.9%. The medical sector is thriving in Tijuana with large projects by Flextronics Medical, Surgical Specialties and Greatbatch Medical.
Guadalajara had a sub-par performance in 2014 with a gross absorption of only 1.3 MMft2, its lowest in the past five years. New construction brought Class “A” inventory to a record 22 MMft2 but vacancy suffered a setback to 5.2% from 4.6% on the prior year. Plexus Electronica, Herdez Foods and Almer had large projects.
Amongst the largest sub-markets, Reynosa continues to struggle to recover, but still managed to post 1.1 MMft2 in gross absorption with a few large projects by Tenneco, Victory Packaging and BBB Industries. New construction and a few vacated buildings increased Reynosa’s vacancy rate to 11.1%.
The large Mexico City Metro Area posted the best performance of all the sub-markets for a fourth year in a row. With another year at about 10 million square feet of gross absorption, this sub-market seems a racetrack between supply and demand.
During 2014, aggressive construction of specs resulted in an atypical high vacancy rate for Class “A” facilities of over 9%. But there is high confidence on this sub-market where a real estate “revolution” continues as wholesalers and retailers in the Mexico City Metro Area pursue the financial benefits of efficient Class “A” buildings and third party logistics (3PL) services.
Practically all of the sub-markets in Mexico are on the rise or “peaking”. Please see Exhibit #4 with the “Mexico industrial property clock” provided by Jones Lang LaSalle, which shows that there are no sub-markets in the “Falling market” phase and only a few are “bottoming” and getting ready to rise.
For a summary of the main projects and transactions in THE MARKET by region in 2014 please glance over Exhibit #5.
In terms of prices of “raw materials” in THE MARKET, there is a definite, albeit slight, upward tendency in the cost for new construction. But land prices continue to increase at a faster pace, particularly in the busy Mexico City Metro Area and the Bajio region.
Competition and reasonable availability mostly everywhere have kept lease prices for all building types practically flat for 2014. Please see Exhibit #6 which illustrates the general, average price trends in THE MARKET.
The soul and heart of industrial promotion
Industrial promotion is the sus-tained, concerted actions of communities to attract industrial investment and create jobs to improve their standard of living and spur economic development.
The act of promoting the attraction of businesses in the U.S. and other developed countries is a task that is generally performed by the government, usually at the state and city levels.
But in Mexico, in the forming years, the leadership of industrial promotion in the various regions was in the hands of private industrial promoters, including industrial real estate developers, shelter operators, plant managers, lawyers and other service providers.
Besides the general benefit of economic development in their region, these promoters were obviously also looking for income generating clients. Any project landed meant income in the form of building rents, sale of land, construction, corporate and tax needs, customs brokerage, outsourcing of labor and food catering among many others needs to operate a manufacturing or logistics facility.
In the 1980’s, the state governments, particularly in the north established formal Economic Development Departments within their administrations and some city governments did as well. They joined with the private developers and created formal and informal promotion alliances.
The soul and heart of industrial promotion
As THE MARKET grew in the 1990’s international real estate brokerage firms identified the opportunity to get a share of the piñata and became very active, adding the competition and controversy elements that brokerage brings to business.
Throughout this process, the presence of the Federal Government in terms of promotion was through various institutions such as IMCE, Nafinsa, Bancomext and as of late, Promexico. The contribution of the federal government to industrial promotion was significant in creating programs for maquiladoras, the auto industry and the free trade agreements.
But as it is well known, the federal government is not a good industrial promoter. Throughout the years, many times pursuing additional tax income, and more often than not, the government would change the tax and customs rules of operation for foreign firms, creating chaos and uncertainty.
In most cases, the dust has settled but not without damaging and delaying potential investments. Noteworthy here, is that without the lobbying of the industrial promoters and the industry institutions to fight for globally competitive terms and conditions for foreign firms THE MARKET would be a lot smaller.
Today there is fierce competition in Mexico to attract foreign firms. The states and cities know well the benefits of industrial foreign investment. And although this story started at the border cities, over the years the winning formula of industrial promotion has spread throughout the country, as have most of the original industrial promoters who currently have operations in multiple regions in Mexico.
Industrial promotion is not a high turnover business. Site selection and transactions may be going for years in the making while evaluating location options. Except for isolated cases, a given project may take about one to two years from first contact with a prospect to a formal closing of a deal.
In addition, an industrial promoter will be lucky to close one out of ten prospects he may be in contact with at a given time. There is no .300 hitting average in industrial promotion.
The cost/benefit equation in industrial promotion is quite a stretch, for example: In a typical project with say seven site location options that progress to two finalists, the winning promoter will rip very high benefits with a reasonable cost, while the second place promoter will get zero benefits and a relatively high cost.
Industrial promotion has also evolved to be a highly professional activity where the promoters and their organizations need bilingual or trilingual skills, economic and manufacturing data and know-how and an assortment of many other tools including composure, patience and aggressiveness.
The industrial promoter knows well that before closing any deal, he has to first sell himself as a professional individual and gain the trust of the prospect client. Without trust there is no closing or deal made.
Mexico is one of the few emerging economies with a world-class industrial real estate sector. By virtue of its proximity to the United States, the caliber of international users (tenants and owners) and the highly competitive environment, THE MARKET boasts top, quality players across its value chain.
The industrial parks, the developers, the general contractors, the real estate brokers, the financial institutions, the capital investors and the professional service providers are truly among the best of the world.
This is why THE MARKET represents one of the most important competitive advantages Mexico has to attract foreign direct investment and technology.
Following this article, please see our gallery of currently ACTIVE top industrial promoters in Mexico who are arranged in no particular rank or order. It is impossible to show all of those who deserve a place in this gallery and if we missed somebody we apologize.
To the ones we were able to identify we tip our hats.
The Outlook for 2015
The global outlook is as uncertain as it has ever been. Most bets by forecasters were taken off the table as light crude oil prices dropped 40% during Q4-2014. The “cold war” blues and the extremist organizations resurgence further fog visibility ahead.
The U.S. will likely continue to improve slightly in 2015 but auto sales are going to be flat as they already peaked at 17 million units in 2014. Manufacturing in general north of the border will be healthy as consumers will have more disposable income, courtesy of cheaper gas. But don’t forget that the long-overdue hikes in interest rates will start before 2015 ends.
Mexico will continue to be attractive for manufacturing, more so with the recent corrections in the peso exchange rate. The export sector will continue to expand but that will not be enough to revitalize the domestic economy.
In 2015, THE MARKET will likely not enjoy as good a year as it did in 2014, but it will grow at about 2%.
Industrial promoters and developers should be cautiously optimistic, selective, investment conservative and most importantly, they must be close to the customer, know and attend to their needs with quality, timely and cost effective solutions.
That’s what competitiveness is… Just keep doing what you do best!