The agriculture industry, long an economic staple of the Rio Grande Valley (RGV), has been at the forefront of the region’s industrial expansion and is seeing its role elevated with more product coming from Mexico. Over the last several years, road and bridge infrastructure improvements throughout Mexico’s southwestern regions have laid the groundwork for increased traffic of produce-carrying trucks headed northeast to the border area.
Ports of entry throughout the RGV have become the top destinations for agricultural imports, surpassing the longtime leader of Nogales, Ariz. This has heightened cross-border trade activity throughout the South Texas ports of entry. Most notably, the Pharr, Texas, port of entry has increased the most in terms of activity, which has led to greater absorption and development of industrial product throughout the McAllen metro area.
Edward Villareal, South Texas Commercial Real Estate
The prime example of this infrastructural development is the Baluarte Bicentennial Bridge. The 3,700-foot, cable-stayed bridge opened in 2013, connecting the Mexican coastal city of Mazatlan to the inland port of Durango and shortening delivery times for product en route to the U.S. border by four to six hours.
As a result, a significant amount of the new industrial development in recent years has centered on cold storage facilities. Companies like Index Fresh (avocados), CIL (third-party logistics) and ScanTech (food safety) have led the development of cold storage space, demand for which has been integral to the overall growth of the market.
While cold storage-related development has been a recent focal point, it only represents part of the increased demand in the area. Historically, the market has been driven by the cross-border activity with Mexico, specifically warehouse and distribution facilities supporting the “heavier” work in Mexico. This cross-border industrial demand still exists and is a major driver of industrial space needs in the McAllen area.
Increasingly, however, we see a more diverse base of users entering the McAllen-Edinburgh-Mission-Pharr area for more traditional reasons. Primarily, industrial users are drawn to a growing population of almost 1 million people (on the U.S. side of border) that offers a young, qualified labor force. In addition, the cost of living in the RGV is among the most affordable in the nation, ensuring that employers can source good labor at very competitive rates.
A portion of this push is for manufacturing space or value-added services, demand for which has traditionally gone to the Mexican side of the border. Black & Decker is the most prominent example of this trend. The Connecticut-based manufacturer of household tools and hardware opened a 260,000-square-foot facility in Mission late last year. The company’s decision to locate in the RGV instead of Mexico, as it originally planned, served as a ringing endorsement of the market’s quality labor supply.
Political Concerns
As a region that shares a border with Mexico, the RGV has been in the crosshairs of mainstream political news for some time. While the migrant crisis has not hindered demand for warehouse and distribution space in the region, it has had some impacts on the industrial operations.
The crisis has forced border agencies to reallocate their resources, specifically in terms of deploying more customs personnel away from legal points of entry to unmanned border crossing sites or other areas where asylum seekers have congregated.
What this means is that there are fewer customs officials and agents on hand to provide support for the border crossings of commercial and non-commercial vehicles. Crossing times for trucks carrying product into the United States. have increased in the short term as a result of the shuffling of workers away from handling commercial products.
We also notice correlations between the general amount of industrial activity in the market and what’s being reported in the mainstream media. In late 2017, development and leasing slowed as the threat of a highly revamped North American Free Trade Agreement (NAFTA) loomed over the regional economy. When it became evident that the new NAFTA deal would not be as disruptive as previously thought, activity continued with positive growth.
What to Monitor
The industrial market in the McAllen-Edinburg-Mission-Pharr area has been on the upswing the last couple of years. Increased absorption, combined with limited new speculative industrial development, has dropped vacancies to historic lows. Today, vacancies are just over 3 percent with approximately 18 million square feet available in the core market.
A good number of quality industrial spaces remain available in the market to accommodate many users. While the number of users needing more than 100,000 square feet is limited, that size of space is not currently available in the market, and in this regard the area needs more supply.
The greatest challenges to adding new supply are directly related to the increased construction costs and in some cases, the increased lease rates that are a direct result. Despite the increased cost, developers that have built new buildings in the last 18 months have been rewarded with projects that have been leased up soon after completion.
While the McAllen area’s industrial market is smaller compared to other markets in Texas, it is dynamic and very much on the upswing. Despite ongoing political issues at the border, this market has become much more diversified with ongoing growth in many sectors, including cold storage, manufacturing/value-added services and organic growth. This activity, combined with the primary trade-related businesses, makes the McAllen industrial market one to continue to keep an eye on.
— By Edward Villareal, principal, South Texas Commercial Real Estate. This article first appeared in the May 2019 issue of Texas Real Estate Business magazine.