Although El Paso’s industrial vacancy rate remains near recession highs, the city is surrounded by positive developments expected to drive stronger demand and allow for tighter industrial fundamentals.
The high vacancy is due in large part to the availability of large, bulk spaces of 200,000 square feet and more. However, such properties account for only 30 percent of El Paso’s industrial inventory, and these structures do not serve the market’s core tenants, which typically seek spaces of 100,000 square feet or less.
There are currently six of these large vacancies in El Paso for a total of 2.6 million square feet, which represents 34 percent of the total vacant space in the market. Without these large blocks of availability, the market vacancy rate would be in single digits; also, several encouraging trends point to improved conditions ahead.
The East and Lower Valley industrial submarkets, which account for more than half of the total industrial inventory in the city, have stabilized for spaces less than 100,000 square feet. Bulk vacancies (in this case, buildings greater than 600,000 square feet) in these submarkets are keeping overall vacancy elevated, but for industrial space that meets the size of El Paso’s core tenants, these submarkets are notably tight with vacancy at 2.9 percent vacancy in the East, 0.6 percent vacancy in the Lower Valley. What’s more, rents are climbing toward pre-recession levels.
To the north, El Paso’s historically difficult Northeast submarket — which includes Butterfield Trail — seems to be going through a renaissance. The City of El Paso and the Airport Authority are in the midst of a $5 million facelift to Butterfield. Also, this submarket is the only area of the city that showed solid net absorption in 2013, with more than 233,000 square feet absorbed in 2013 for a decline in vacancy of 270 basis points during the second half of the year.
To the west, the Union Pacific Rail Yard project is ahead of schedule. Supported by the recent Overweight Cargo Zone connecting the Santa Teresa Industrial Park to the border crossing with Mexico, the $400 million investment to create an inland port facility just west of the Santa Teresa Airport in New Mexico is expected to have a considerable impact on logistics demand in El Paso, Ciudad Juarez and Southern New Mexico. The investment is already spurring industrial space demand in Santa Teresa, with more leasing activity recorded in 2013 than the previous five years.
Last, but most importantly, strong manufacturing activity in Ciudad Juarez to the south led to record net absorption of 2.7 million square feet in 2013. While the city is across the border, its manufacturers are a key driver of industrial real estate demand in El Paso. Thus, elevated and rising maquiladora (Mexican assembly or manufacturing operations) output should boost the demand for space from suppliers and logistics providers in El Paso following the typical 9- to 12-month lag for activity in Ciudad Juarez.
Another important consideration when it comes to spillover demand from Ciudad Juarez is the recent fiscal reforms in Mexico. The increase in the value-added tax from 11 percent to 16 percent and the yet-to-be-finalized changes to the maquiladora program may impact the inventory carry cost of regional warehouse providers, giving them an extra incentive to store product on the U.S. side of the border, rather than incur increased taxes in Mexico.
Taking the Next Steps
In the near-term future, these trends should accelerate the recovery in El Paso’s industrial market. Investors seem to agree, as there is robust activity in El Paso. Four investment sale transactions totaling more than 1.7 million square feet closed in 2013, and there was another 450,000 square feet of one-off user building sales.
Additionally, there are four more portfolios expected to trade in 2014, and these together total more than 2.7 million square feet. The resulting investment in deferred maintenance, particularly in Butterfield, should support healthy rent growth.
Market trends through 2015 may catch those without an “ear to the ground” in El Paso by surprise. Occupiers should see rental rates increasing and space scarce for deals less than 100,000 square feet, especially for renewals without options set in the contract. Investors should have more opportunities to participate with increasing activity as Mexico continues its rebound and rising net operating income drives higher real estate values.
— By Christian Perez Giese, Senior Vice President and Director, and Sara Rutledge, Director of Research & Analysis, CBRE. This article originally appeared in the April 2014 issue of Texas Real Estate Business magazine.