The current pace of development and absorption of manufacturing and warehousing space in El Paso reveals just how closely the local economy is linked to that of its sister city across the border, Ciudad Juárez.
Mexico’s maquiladora system allows foreign companies to produce and export materials to that company’s home country, largely on a duty- and tariff-free basis. When the North American Free Trade Agreement (NAFTA) was passed in the mid-1990s, maquiladora activity saw its largest historical increase while still facing considerable competition from China for foreign investment.
Russell Hanson, Hanson Asset Management
But when American manufacturers realized that outsourcing production to China didn’t translate to more efficient supply chains, they once again looked toward Mexico, which also boasted strong supplies of affordable labor.
With the United States now locked in a trade dispute with China, the economic development initiatives offered by the current Mexican Presidential Administration and the threat of a drastically renegotiated NAFTA agreement having passed, American companies are beginning to return to Mexico. Ciudad Juárez is among the Mexican cities benefitting most from this activity, and it is translating to greater demand for storage and distribution space in El Paso. Many maquiladora companies count end users in southwestern U.S. markets as significant parts of their customer bases.
Companies that supply parts for the automotive industry are among the biggest drivers of absorption of manufacturing space on the Mexican side of the border and of warehouse and distribution space on the American side. Other key industries within the maquiladora system include producers of semiconductors, healthcare equipment and electronic communications gear.
Arturo De la Mora, CBRE
Once product clears customs, El Paso is the logical point for Mexican truckers to unload, store and distribute product to American consumers, in both El Paso and other regional markets.
New Development Growth
As a rule, developers and general contractors in Mexico face the same rising costs of construction labor and materials that American builders do. But demand for factory and warehouse space in Ciudad Juárez is propelling new construction of both specialized and speculative product on the American side of the border.
Some industry professionals have estimated that for every 1,000 square feet of new manufacturing space that is delivered in Ciudad Juárez, at least 100 square feet of space is needed in El Paso for support services, mainly storage and distribution.
New positions within those facilities are contributing to El Paso’s overall job growth, though some industry professionals believe that both border markets are beginning to see labor struggles among industrial users.
Speculative industrial development has been unheard of in El Paso during the current industrial market cycle. CBRE reported that developers delivered approximately 935,000 square feet of new industrial product in 2018, nearly 30 percent of which was on spec. While the market is still underserved in terms of this product type, recent market trends suggest there is potential for that to change.
In 2018, Hanson Asset Management delivered El Paso’s first speculative project of the current market cycle, an 87,726-square-foot warehouse located near the Ysleta-Zaragoza International Bridge. Shortly after its completion, the entirety of the space was leased to transportation and logistics firm Pilot Freight Services, which handles product from e-commerce, automotive, aerospace and healthcare firms. Hanson is also nearing completion of a 125,646-square-foot speculative project in the same area, which has the capacity for future expansion and will be marketed to logistics users.
Rent Growth
Demand for new space is fueling a stronger pace of rent growth throughout El Paso. According to CBRE, the market closed 2018 with record net absorption of nearly 2.5 million square feet, a 170 percent increase compared to 2017.
Consequently, the vacancy rate, which has declined over the last five years, dropped by 230 basis points between 2017 and 2018 and finished the year at 5.2 percent. Over the last 18 months, the market has seen a premium of $0.50 to $0.75 on asking rents for Class A warehouse/distribution space, and closed 2018 with an average of $4.81 per square foot.
As things currently stand, El Paso has a decently sufficient supply of infill sites available for new development that offer proximity to key pieces of infrastructure. As construction costs rise, developers will continue to push rents until the volume of new supply catches up with demand. For this reason, we also expect more speculative builders to enter the market.
Final Thoughts
A very linear, mutually dependent relationship has always existed between El Paso and Ciudad Juárez, and this will only continue to strengthen. Ultimately, the health and sustained growth of El Paso’s industrial market will hinge on the success of maquiladora activity in its sister city.
El Paso workers, business leaders and city officials are counting on political and trade tensions to continue to have modest to minimal economic impacts on the region. Limited economic disruption from these forces will be central to both cities’ continued expansion and propulsion of the regional economy.
— By Russell Hanson, owner, Hanson Asset Management, and Arturo De la Mora, senior associate, CBRE. This article first appeared in the April 2019 issue of Texas Real Estate Business magazine.