Sara Rutledge, CBRE
There is no denying that most, if not all, industrial markets across Texas were exposed to the economic effects of the “Great Recession.” McAllen and the Rio Grande Valley of Texas were no different. However, today Texas markets are again thriving with activity and occupancy above recession-contracted rates. Trends for McAllen—the seventh largest industrial market in Texas—are following suit.
Economic
The McAllen-Edinburg-Mission metropolitan statistical area (MSA) has evolved as a vital part of the dynamic Rio Grande Valley in south Texas. Once a rural and agricultural region, the area is now one of the fastest growing in Texas, fueled by accelerated population growth, economic development and a booming neighboring industrial market in north-central and northeastern Mexico. Data from the U.S. Census Bureau show that the McAllen MSA, also defined as Hidalgo County, has almost tripled in population since 1980, from 283,323 to 815,996 in 2013.
Pedro Nino Jr., CBRE
Likewise, an overall Metro Business Cycle Index produced by the Federal Reserve Bank of Dallas places the McAllen MSA as the second most improved metropolitan area in Texas and first among the border markets, relative to its own base since 1980. The index, which summarizes the broad movements in nonagricultural employment, the unemployment rate, real wages and real retail sales, highlights the development McAllen has seen over the last three decades.
Background / Industrial
The industrial sector is one of the major economic contributors to the region today. Data show that economic growth accelerated for McAllen around 1997, after the North American Free Trade Agreement was enacted. The agreement incentivized trade between the U.S., Canada and Mexico, and spurred commercial and industrial expansion as a result of trade liberalization and other forms of business deregulation between border economies.
Carlos Telles, CBRE
McAllen has benefitted due to its major ports of entry from Mexico and proximity to prime Mexican industrial markets, such as Reynosa, Monterrey, Saltillo and Bajio.
According to the Texas Center for Border Economic and Enterprise Development, during 2013, the Hidalgo/Pharr/Anzalduas Port of Entry accounted for $16 billion of import trade with Mexico, up 6.6 percent year-over-year. There are approximately 383 industrial properties in the combined McAllen, Pharr, Edinburg, Hidalgo and Mission submarkets totaling 22.3 million square feet of industrial space. This places McAllen as the seventh largest industrial market in Texas.
Further broken down, space is comprised of approximately 45 percent warehouse and distribution space, much of which supports maquiladora production in north-central and northeastern Mexico, as well as a strong concentration of cold storage and agriculture-related facilities (12 percent), also related to product coming from Mexico.
Recent Trends
Since CBRE Research began tracking the McAllen industrial market in 2009, it has been in a steady recovery, improving from a vacancy rate of 15.8 percent in 2009 to 11.3 percent at the end of Q4 2014. During this six-year-period, the bulk of demand has come from the maquiladora industry in Mexico and the agricultural sector, either
directly or as a support operation, such as through examples like third-party logistics firms.
Because of the economic integration with Mexico’s maquiladora industry, McAllen has followed similar trends tied to industrial output, primarily to the manufacturing of automotive components, consumer electronics, and more recently medical device manufacturing. McAllen is also a prime location for the cold storage and distribution of produce into Texas.
With the exception of a large project for Royal Technologies, the remaining new construction projects in the last 12 months have been for perishable cold storage with additional developed lots already available for similar projects. Furthermore, improved market conditions in 2014 will likely stimulate additional construction projects in 2015. As of Q4 2014, there was a total of 1.6 million square feet of active requirements for third-party logistics and manufacturing operations requiring warehouse space. These potential projects would support the electronics, automotive and other industries.
The industrial market directly across the border in Reynosa has also shown signs of strength—positive news because manufacturing operations in Reynosa are a key driver of industrial real estate demand in McAllen.
Vacancy in the Reynosa industrial market is down to 9 percent, compared to a rate above 15 percent in 2009. Another key indicator of production in Reynosa is the number of people employed by the manufacturing sector. According to the Instituto Nacional de Estadistica y Geografia, total maquiladora employment is now 94,601 and close to the pre-recession peak of 101,598 in 2007.
Activity has also spurred investment from developers as Q3 2014 registered the highest square footage under construction in over three years. Both U.S. and Mexico industrial production numbers reflect growth in output. Further out, CBRE Research is also keeping an eye on recent and future endeavors that may potentially impact industrial demand in McAllen and the Rio Grande Valley.
The recent multi-billion-dollar investment announcements by major automakers will likely stimulate demand in Reynosa and McAllen. Although no direct investment is planned for Reynosa, both local markets have a strong concentration of automotive component manufacturing and other automotive supply chain operations. The recent announcement by SpaceX to establish the world’s first vertical rocket launch site at Boca Chica Beach, on the edge of South Texas, is sparking enthusiasm. The $100 million capital investment is expected to create 500 jobs over a 10-year period while indirectly creating 400 jobs from potential suppliers.
Last, but equally important, CBRE Research is observing how Mexico’s recent energy reform may impact Texas industrial markets, including McAllen. The reform is expected to boost Mexico’s GDP from increased oil and natural gas production along with increased foreign investment. The result may strengthen trade flows between Texas and Mexico while supporting industrial markets on both sides of the border.
— By Sara Rutledge, director of research and analysis, Pedro Nino Jr., research coordinator, and Carlos Telles, associate, CBRE. This article first appeared in the February 2015 issue of Texas Real Estate Business magazine.