With an inventory of about 63 million square feet, El Paso’s industrial market has played a pivotal role in the business of commercial real estate for the past 10 years. During that stretch, portfolio trades have come to dominate industrial transactions in this market.
For example, Dallas-based Stonelake Capital Partners recently added to its holdings by buying four buildings from 5 Star Real Estate in Vista Del Sol East totaling about 567,000 square feet. Stonelake had entered the market several years prior after buying 11 buildings totaling roughly 1 million square feet in Butterfield Trail Industrial Park from two separate entities, Louis Kennedy and Lincoln Properties.
Doug Derrick, NAI El Paso
Other defining examples of trades include the activity of IndCore, a Blackstone company that began buying Industrial real estate in El Paso in 2010. The company purchased 1.2 million square feet of assets from Prologis; 1 million square feet of space from Northwestern Mutual Credit and 1.2 million square feet of product from UBS.
In addition, Allstate foreclosed approximately 500,000 square feet of the KASCO portfolio in 2011, which was re-sold to Covington Capital in 2015. CIII Capital Partners absorbed eight buildings totaling 900,000 square feet from Titan Industrial in 2012. Soon after, CIII sold those buildings to two investment groups, Hagar Pacific and Indel Foods.
Finally, in 2012 IDI bought the Verdi portfolio and several other buildings, most of which are located in Pan American Park at the Zaragoza Crossing and in Santa Teresa, New Mexico.
One driver of this activity is the lack of construction of new industrial properties over the past 10 years. But industrial rents are beginning to increase, with annual rates for El Paso warehouses currently averaging just over $4 per square foot.
El Paso is a logistical warehouse market. Our sister city is Juarez, Mexico, a major manufacturing and assembly hub. El Paso is a major gateway for raw materials going into Mexico and finished goods — including medical products, computers and wire harnesses — coming out that are destined for American markets.
The other explanation behind the trend is “obsolescence during transport” also associated with valuable product. Labor in Mexico is less expensive than in the United States. However, many manufacturers that had previously left for cheaper labor in the east have returned to Mexico because of the necessity of receiving raw materials and delivering goods “just in time.”
There have been other frustrations with manufacturing in the east. The quality is reported to be better in Mexico and the manufacturer has more control over certain proprieties.
As production in Mexico continues to increase, the general expectation is for rents to continue to rise, possibly at a faster pace than in recent history.
The other part of the equation involves operating expenses. In 1997, the average annual operating expense quote might have been about $.85 per square foot. Today, that same building might be burdened by annual operating costs of $1.50 per square foot — an increase of approximately 75 percent.
The vast majority of that increase is tied to rising property taxes. Today, base rents are higher than ever, as are operating expenses, and it’s hard to see that changing any time soon.
With manufacturing on the rise in Mexico, vacancies should continue to decrease. According to CoStar, vacancy for warehouse inventory took a slight dip at the beginning of 2017 and bottomed out at about 9 percent. Vacancy has since increased slightly to 9.4 percent at the end of the second quarter, compared to its hovering around the 10 percent mark throughout late 2016.
It should be noted that actual vacancy reports for El Paso properties tend to be a bit misleading. There are a handful of large, dysfunctional buildings that are not easily divisible, which skews the vacancy percentage. Taking these properties out of the equation yields an effective vacancy rate closer to 5 percent.
The trends point to continued declines in vacancy and increases in lease rates going forward. Since the beginning of the year, net absorption has been positive, exceeding 500,000 square feet.
— By Doug Derrick, managing broker, NAI El Paso. This article originally appeared in the September 2017 issue of Texas Real Estate Business magazine.