Recent Deals Spotlight Growing Investor Appetite for Industrial Assets Along U.S./Mexico Border
Lower Tariffs Under NAFTA , Factory Reshoring and Lower Energy Costs Fueling Distribution & Manufacturing Expansion In Texas Border Markets
Demand for industrial property on both sides of the U.S./Mexico border is on the upswing as manufacturing and logistics companies take advantage of lower labor costs and tariffs under the North American Free Trade Act (NAFTA), particularly in the wake of recent labor disputes at the U.S. West Coast, combined with rising costs on goods shipped to the U.S. from China.
Several large portfolio transactions this year reflect the trend. Global Logistic Properties Ltd.'s $8.1 billion purchase in February of the nearly 1,100-property IndCor Properties portfolio from Blackstone Group LP included 18 buildings totaling 2.13 million square feet in El Paso.
In recent weeks, Dalfen America Corp. has announced the acquisition of six Class A industrial buildings totaling 767,952 square feet in McAllen, TX, a key port of entry for components and goods from the nearby maquiladora plants in Reynosa, Mexico.
Meanwhile, Sealy & Co. in late June and early announced the acquisition of a 902,715-square-foot portfolio of industrial buildings from Prologis (NYSE: PLD) in El Paso on the western tip of Texas, the main distribution point for goods from Juarez. The five buildings in El Paso's East industrial submarket were 95% occupied at the time of sale and are less than five miles from the Zaragoza Bridge at the Ysleta Port of Entry, the main border crossing between Juarez, Mexico and El Paso for distribution and logistics.
Sealy added a 102,000-square-foot building, one of the few cross-dock facilities in El Paso, in a separate deal announced last week. And, while Sealy is bulking up in border markets, it's divesting core industrial properties in the major Texas markets.
On June 29, Sealy unloaded 19 core institutional grade properties in Dallas, Houston and San Antonio, owned as part of Sealy's joint venture with global investment management firm AEW Capital Management.
The Texas border cities have traditionally been perceived as warehouse and logistics markets, but manufacturing is playing an increasingly prominent role as the rising cost of producing and shipping goods from China has prompted manufacturers to reshore to the United States and Mexico.
The trend is driving demand for both light-industrial and logistics space near the border, said Sean Dalfen, president and chief investment officer of Dalfen America Corp., whose portfolio in McAllen's 1,200-acre Sharyland Business Park includes such tenants as Fisher & Paykel, Protrans International and CommScope Inc. and is located near the Anzalduas International Trade Bridge leading to Reynoso.
"Initially when we looked at the portfolio, we thought the fundamentals were based around logistics," Dalfen said. "Only after we studied the market did it become clear that the true reason for being in this market didn’t have to do with logistics at all. It had to do with manufacturing."
Under NAFTA, manufacturers can assemble goods with lower-cost labor in the maquiladora plants clustered south of the border, and then ship the products to the U.S. for finishing or the addition of components, allowing companies to apply the coveted "Made in America" sticker, Dalfen said.
Dalfen said labor disputes at the Ports of Long Beach and Los Angeles caused a 30% decline in goods coming into the West Coast and may be part of the secular shift of goods movement from the West Coast to inland border crossings.
"Things move fast in today's market, and if you can’t get goods to your client, you're in trouble," Dalfen said.
The McAllen and Laredo markets is a key ports of entry for the burgeoning automotive manufacturing cluster in the Monterrey/Saltillo area of Mexico, where Mercedes-Benz, General Motors and Chrysler and several others operate assembly plants, Michael J. Blum, director for NAI Global office in McAllen, who has done business in the Rio Grande Valley
"We have a ready supply of product and there's a continuing stream of movement of manufacturing into the region, and it's warming up as the U.S. economy strengthens," Blum said.
Demand for property in Texas border markets is reflected in strengthening occupancy numbers. The combined industrial vacancy rate for the markets of El Paso, Brownsville-Harlingen and McAllen/Edinburg/Pharr has fallen from 15.1% in 2010 to 12.7% as of the first quarter of 2015, according to CoStar data.
The markets have seen little new construction since the last market cycle in 2008. Asking rents have increased from a cyclical low of $3.65 per square foot in 2013 to just under $4 per square foot this year.