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Fate of NAFTA, Foreign Trade to Shape Rio Grande Valley Office Market in 2018

Chase-Tower-McAllen-Texas

At 17 stories, the Chase Tower in McAllen is one of the few high-rise office buildings in the RGV. The market has always been steady, albeit devoid of trophy office assets. (Image courtesy of LoopNet Inc.)

The economy of the Rio Grande Valley (RGV) has always been closely linked to foreign trade.

The region’s numerous port markets and its proximity to Mexico — in particular, the robust industrial market of the Mexican border city of Reynosa — have always ensured that international commerce plays a key role in the economic success of the RGV.

Manufacturing and distribution have always been major drivers of growth in the RGV. We often analyze the performances of these sectors when gauging the health of the region’s office market, as the performance of the office market tends to trail the performance of the industrial sector, usually by a period of 12 to 18 months.

Mark Russell, Newmark Knight Frank

The office market of the RGV consists mostly of small, Class B properties developed in the 1980s and 1990s. There are no true skyscrapers or trophy assets in this region, as office users in the RGV simply don’t demand the level of amenities and quality of space as their counterparts in major markets.

Small and steady as the office market may be, it is not immune to the influence of larger political movements. Everyone with a vested interest in RGV commercial real estate is keeping a close eye on President Donald Trump and the North American Free Trade Agreement (NAFTA). This interest extends to the broader RGV economy as well, evidenced by the recent NAFTA awareness seminar sponsored by the City of Pharr and the Mexican consulate in McAllen.

The president, an established supporter of the manufacturing sector, has pledged to either dismantle the agreement or to restructure it in manners that he deems more beneficial to American firms.

The terms of a renegotiated NAFTA deal remain to be seen. But any impacts on development or absorption in the industrial market are likely to be felt by the office market in turn.

Connecting The Dots

The intrinsic connection between the RGV’s industrial and office sectors is relatively straightforward. Manufacturing makes up much of the RGV’s employment base. Goods coming off assembly lines need to be marketed and sold, inventories need to be tracked and accounting records need to be kept.

Manufacturing plants typically include less, if any office space compared with warehouses and distribution centers. As such, the ancillary professionals of these operations, like the sales forces and bookkeepers, constitute a good portion of the demand for the region’s office space. When major industrial developments are either announced or break ground, the absorption and leasing velocity for office space tends to increase within the next year to 18 months.

An example of this trend in action involves Connecticut-based Stanley Black & Decker, one of the largest producers of tools and hardware worldwide. The company recently opened a 300,000-square-foot manufacturing plant in Mission, a project that is expected to generate about 450 new jobs. The company also operates a 500,000-square-foot facility in Reynosa.

Because the Mission plant only recently began operations, there has not yet been the expected accompanying increase in office occupancy, but expansion is anticipated in the near future. Put simply, the more investment that major firms make on the industrial side, the greater the impact on the office market. However, regardless of industrial activity, the small — yet stable — RGV market does not experience the usual ups and downs that a larger office market does.

The average office lease size in the market, which currently has a vacancy rate of 7 percent, is about 2,800 square feet. Full-service rates (expenses factored in) for office assets in the RGV are typically in the low $20s per square foot.

Overall, the stability of the RGV office market is a function of disciplined lending and development practices as seen over the last several decades. NAFTA dealings aside, we expect the market to continue to display stability and a close relationship with the industrial market — the true driver of growth in the RGV.

— By Mark Russell, vice chairman, Newmark Knight Frank. This article first appeared in the May 2018 issue of Texas Real Estate Business magazine. 

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