Industrial Vacancy Tightens in El Paso Despite Heavy Construction
Trade and politics are nothing new for El Paso, Texas and its sister city Ciudad (Cd.) Juarez, Mexico.
The history of the region is rooted in the interrelationship between two countries, three states and a trading route that originally ran from Mexico City to Santa Fe along the Camino Real.
Today, international trade and political fights from elsewhere still have a considerable influence on what locals are talking about. But the regional industrial market continues to thrive by staying well below the radar. Despite concerns of imminent steel tariffs, restructuring of North American Free Trade Agreement (NAFTA) and the construction of an expanded border wall, the regional industrial economy keeps humming along, bringing the real estate market along with it.
For industrial real estate tenants, the lure of a globally competitive workforce in Cd. Juarez and a link to the U.S. transportation infrastructure in El Paso makes this region a beacon for industrial users across the world.
Triangle of Trade
Take a two-hour drive along the loop highway circling El Paso, Cd. Juarez and Santa Teresa, New Mexico, and you will find an eye-opening list of international companies with industrial footprints. Foxconn from Taiwan, Polygroup from China, Bosch from Germany and Automotive Lighting from Italy are just a few with a major presence on both sides of the border. These firms manufacture some of the most technologically advanced products consumed today, such as fuel injectors for cars, wind blades for renewable energy operations and configured-to-order server racks for data centers.
Fundamentals are strong in El Paso’s industrial real estate market as of the beginning of 2018. Demand for industrial space in El Paso is closely linked to manufacturing and distribution operations across the border in Cd. Juarez.
The Twin Plant model of labor-intensive manufacturing operations in Mexico and the more capital-intensive support operations (plastic molding, metal stamping, sterilization, etc.) and warehousing in El Paso has largely remained true. This relationship allows the El Paso industrial market to punch above its weight compared to other demographically comparable cities in the U.S.
At the end of 2017, El Paso’s 57-million-square-foot industrial market was 7.5 percent vacant, down from 8.8 percent a year earlier. That downward trend prevailed during the first quarter of 2018, with demand staying ahead of a very limited volume of new supply.
The level of new industrial construction in El Paso — 771,500 square feet at the end of the fourth quarter of 2017 —has not been this strong for well over a decade. But unfortunately for users, very little of it is showing up as available space. In addition, there are five major build-to-suit to own projects under construction or already completed in El Paso.
Amazingly, only two new speculative buildings are under construction north of the Texas/Mexico border, both of which will deliver this month and are being developed by local firms. These projects include an 87,000-square-foot building developed by Hanson Asset Management next to the Ysleta-Zaragoza International Bridge, and a 182,000-square-foot property developed by Franklin Mountain Industrial near the Santa Teresa (N.M.) airport. Limited new supply has driven up leasing velocity , forcing several companies to resort to buying land to build their own facilities.
As you dig even deeper into the industrial vacancy rate, the picture becomes more interesting. Fifty-three percent of the vacant industrial product consists of spaces that are 200,000 square feet or larger. This figure accounts for six industrial buildings, the largest being an 870,000-square-foot property that has been vacant since 2012.
The average new lease size over the past five years has been just 45,000 square feet. There have been exactly five new leases above 200,000 square feet since 2015, including one build-to-suit for FedEx. If you consider the core industrial market in El Paso as comprising spaces measuring 100,000 square feet and below, the vacancy rate is only 3.5 percent.
Over the past five years, the ownership landscape for industrial assets has changed noticeably in El Paso. For those investors that understand the dynamic drivers of the industrial market and have been perceptive enough to build a portfolio, returns have been excellent. Prologis, Lincoln National Life and Verde, among others, have sold their El Paso assets only to be replaced by the likes of Covington, GLP, IDI Logistics, Stag, Sealy, Stonelake and Via West.
While some of the traditional developers with a working knowledge of El Paso have left the market, those that have entered are benefiting from the lack of new, competitive supply and steady demand.
— By Christian Perez Giese, senior vice president, CBRE, and Elisabeth Downs, research coordinator, CBRE. This article first appeared in the April 2018 issue of Texas Real Estate Business magazine.