Heightened Border Activity Drives Down Industrial Vacancy in Rio Grande Valley
The industrial market of the Rio Grande Valley (RGV) is off to a blistering start in 2018, thanks to a combination of increased commercial activity around the U.S.-Mexico border and renewed political and military interest in the region.
We use the tri-city area of McAllen-Edinburg-Mission, now the fifth-largest MSA in Texas, as a yardstick for our regional analysis. According to CBRE, industrial vacancy in this market registered an all-time low of 3 percent during the first quarter.
In addition, the market posted positive net absorption of approximately 79,000 square feet during the first quarter, a year-over-year increase of 24,000 square feet. Average asking rents for industrial space are also up 40 cents from the first quarter of 2017.
Demand for industrial space in the RGV has always been a factor of the region’s proximity to Mexico. The Mexican border city of Reynosa absorbed more than 2 million square feet of industrial space in 2017. More than 1 million square feet of industrial product is under construction in Reynosa, and the pipeline includes everything from heavy manufacturing plants to rail-served distribution centers.
This aspect of the RGV’s location has always played a pivotal role in generating demand for warehousing — for both raw materials and finished products — in the region. In addition, there are more than a dozen international bridges in the RGV, ensuring that the region functions as Mexico’s “front door” to the U.S. and Canada.
But these features are nothing new to the RGV industrial market. What is new to the market are several infrastructural improvements and a strong interest in the region from Washington, D.C.
Infrastructure Plays Key Role
The two primary port cities of the RGV — Harlingen and Brownsville — are both investing in infrastructural improvements to increase the volumes of cargo they can handle. These include projects to widen and deepen shipping channels, to expand railyards and rail access and to rebuild docks that handle liquid bulk product.
Such investment prompts construction of smaller warehouse spaces in and around the ports. These spaces that are typically leased by materials suppliers and contractors for larger port projects, which has helped pare down the industrial vacancy rate in those markets.
In addition, a new rail bridge crossing is fueling the multimodal stronghold in the Brownsville-Harlingen MSA, including the development of a new cold storage inspection facility at the Los Indios bridge.
On the distribution front, a major thoroughfare in the RGV — U.S. Highway 83 — recently received interstate designation and is now operating as Interstate 2. This will enable expansion and allow more trucks to move product in and out of the region.
Furthermore, Texas cities are working to raise money for the continued development of Interstate 69, which will offer a more direct connection between the RGV and destination markets in Texas.
Recent discussions of combining the area’s metropolitan planning organization could potentially elevate the amount of dollars for road infrastructure in the region. Discussions are ongoing and there has been a struggle to justify the merger in terms of its benefit of the region. But with or without a merger, the amount of traffic and growth in the area will undoubtedly require more funding to keep up with the needs of its residents and businesses.
Politics at Play
The uncertainty surrounding the future of the North American Free Trade Agreement (NAFTA), as well as the redevelopment and extension of the existing wall between the U.S. and Mexico, has sent industrial developers and operators scrambling to maximize volumes of production and distribution as quickly as possible.
Drug cartel-related violence at the Mexican border continues to hinder industrial development in the region, making overall demand softer than in years past. But in contrast, heightened security at the border as part of the crackdown on illegal immigration has bolstered demand for industrial space from defense contractors and other similar parties.
The politically charged position in which the RGV currently finds itself — combined with the fact that the pace of new construction has held steady for several years — is beginning to attract large, nationally recognized users.
These newcomers to the industrial scene over the last couple years include: auto parts manufacturer SATA Group, which has approximately $114 million in capital investment in the RGV and ultimately expects to employ 300-plus people; CARDONE Industries, another supplier of automotive parts that is developing a $50 million distribution facility and is expected to account for 500 to 750 new jobs; and Stanley Black & Decker, which is expected to invest $25 million in a 300,000-square-foot manufacturing plant that could create as many as 450 new jobs. Lastly, Big River Steel has named Brownsville a finalist for its new 800-acre steel plant, a project that would bring more than $1.5 billion in investment dollars to the region.
Historically, the RGV’s industrial growth was geared toward servicing the expansion of local users and introducing the maquiladora system — wherein foreign countries establish factories or distribution hubs for exports to the mother country. But the tide appears to be turning. Industrial tenants are increasingly recognizing the RGV’s capacity to offer multimodal logistics.
Whether they’re looking to plant their flag for the first time or relocate an established operation, Texas is a leading market for manufacturers and distributors alike. The state’s renown pro-business position, which takes the form of low taxes and minimal government regulation, continues to be a major driver of this activity.
But not all of that action is confined to major markets. In the RGV, industrial users find a network of business professionals, commercial brokers and developers that possess an intimate understanding of cross-border politics and culture that goes well beyond Mexico. The growth of a young, skilled labor force in the RGV is also working in the region’s favor.
The supply of young, educated workers in the RGV should be even better served by the growth of the University of Texas Rio Grande Valley Texas A&M University, which recently announced plans to open a higher education center in McAllen. The state’s largest university has pledged to grow that footprint with more educational developments over the next decade.
As both America and Mexico continue to grow and trade with one another — or so we hope — industrial firms will come to realize that having the RGV on their radar is an essential part of their strategy. We consequently expect the volume of industrial development to continue to grow along with the region’s population.
By Lupita Gutierrez-Garza, principal, Southern Commercial Real Estate. This article first appeared in the May 2018 issue of Texas Real Estate Business magazine.