By Daniel Galvan, SIOR, principal, Coldwell Banker Commercial RGV
The Rio Grande Valley (RGV) industrial market continues to be very active despite a small, temporary slowdown due to the COVID-19 pandemic. With single-digit vacancy rates in both Hidalgo and Cameron counties, absorption is holding at a steady pace as available space has declined. To that point, the market saw approximately 250,000 square feet of net absorption in 2020.
Rents have also continued to increase modestly with elevated demand, rising approximately 5 percent in the first quarter of 2021 relative to that period in 2020. However, that rate of growth should slow a bit in the coming months given that the market is still fraught with uncertainty due to COVID-19. Despite this uncertainty, we typically see upcoming vacancies continue to be filled prior to actually becoming vacant.
Daniel Galvan, Coldwell Banker Commercial RGV
While the agriculture industry continues to be a very large driver of absorption in the RGV’s industrial sector, there are more deals than ever for users that focus on consumer goods and fulfillment. There has also been a large amount of growth in demand from third-party logistics (3PL) companies and manufacturers. These users ultimately accounted for about 200,000 square feet of positive absorption in 2020, according to CoStar Group.
Increased demand in consumer goods — and the industrial users that supply and deliver them — shows the heavy extent to which people are shopping online. In addition, demand for e-commerce services has led to the development of some facilities that are larger than what the market is accustomed to seeing.
With this trend in mind, landlords continue to have success in terms of preleasing campaigns. Positive preleasing activity, in turn, leads to increased developer confidence, which subsequently brings more investment attention to the region.
Due in part to the political climate of Mexico, as well as to the demand for industrial space that country is seeing, developers and investors from Mexico have recently established a much stronger presence in the RGV. These firms work alongside the established, local, regional and institutional developers and investors that have done business in South Texas for many years.
In addition, the region’s economy is largely dependent on trade and cross-border shopping. Mexican nationals account for approximately 30 percent of retail spending in the RGV. With the border temporarily closed to nonessential traffic, the entire region has been affected.
Despite that, the RGV continues to be unique to other parts of the state and country as a distribution point for goods. Cross-border traffic should be back to normal sooner rather than later, and The Pharr International Bridge should also be a key infrastructural piece in boosting trade between Mexico and the United States
Additionally, the new trade agreement in place between the United States and Mexico (the USMCA to replace NAFTA) has been finalized and should encourage more industrial tenants to look for space in the market.
Cold storage facilities have also fared well of late — the need for refrigerated space for fresh produce is largely responsible for a lot of the industrial demand in the RGV. About 65 percent of all produce coming across the border from Mexico passes through the RGV en route to its final destination, as it has for many years. Consequently, there should not be any changes to the demand and need for cold storage facilities any time soon.
As the region’s industrial market continues to flourish and supply struggles to keep up with demand, land and building values also continue to climb. The price of developed industrial land has reached $130,000 to $160,000 per acre — a level of escalation that indicates a need for more development.
The limited supply of existing buildings is also challenging for end users in the market that are looking to acquire and occupy an industrial building. With the lack of inventory, price points have risen and are now at approximately $50 per square foot for dock-high distribution buildings. The lack of construction and development is also a contributing factor to increasing building values.
Despite developer confidence and historically low vacancy rates, the market is seeing some new construction. Most of the market’s new development will likely be located near The Pharr International Bridge, as there are large amounts of land available in that trade area that can be acquired at relatively reasonable prices.
— This article originally appeared in the May 2021 issue of Texas Real Estate Business magazine.