Archives for September 2020

More Firms Are Setting Up Shop at Santa Teresa

September 14, 2020 by CARNM

The pandemic has busted up business activity across the state, but not at the Santa Teresa border industrial parks in southern New Mexico.
Business there is booming, with state exports to Mexico up 11% in the first half of 2020, and a wave of fresh public and private sector investment flowing into new industrial buildings and infrastructure at the parks. Commercial traffic through the Santa Teresa Port of Entry is on a steady upward trajectory, reaching record levels this summer.

The coronavirus lockdown did briefly slow border business during the spring, but when the economy began reopening in June, Santa Teresa’s previously bustling commercial activity bounced right back, said Jerry Pacheco, executive director of the International Business Accelerator and president of the Border Industrial Association.
“It was kind of a sob story at the start, as people watched in horror during the coronavirus lockdown,” Pacheco said. “Activity was down significantly in April and May, and a few firms did furlough some of their employees for two or three months. But as the economy slowly opened up in June, things bounced back rapidly, and now commerce here is running above 2019 levels.”
In many respects, the pandemic actually boosted business on the border, where Santa Teresa-based firms produce materials and components for factories in Mexico that assemble everything from computers, consumer electronics and processed foods to automobiles and industrial equipment that they then ship back to U.S.-based businesses.
‘Big supply basin’
Santa Teresa’s industrial parks house massive warehouses for products crossing back and forth across the border, backed by a network of transportation and distribution firms that manage the constant movement of goods in all directions. The entire industrial zone operates as one of the nation’s largest inland ports for truck-and-train transshipments across North America.
As online ordering for consumer products of every kind have skyrocketed in the pandemic, business at the border has surged.
“Santa Teresa is a big supply basin for Mexico’s industrial (manufacturing) base,” Pacheco said. “People everywhere sit at home ordering on Amazon, and the factories that supply those products – like Foxconn’s computer assembly facility just across the border – need the plastic, steel, electronics, components and packaging that Santa Teresa businesses supply.”
In addition, during the early months of the pandemic, supply chain disruptions from factories in China and other Asian countries – which supply goods and components to North American businesses – forced manufacturers here and in Mexico to deplete their industrial inventories. Now, with consumer demand growing again, factories are stocking back up.
“The global supply chain disruption created a lot of pent-up demand, so we’re seeing a lot more Mexican orders now for materials and components,” Pacheco said.
The pandemic even generated a boom in activity for some Santa Teresa-based firms, such as FedEx Ground services, medical instrument and food sterilization company SteriGenics, and the telecommunications firm Commscope Connectivity Solutions.
“SteriGenics is going gangbusters,” Pacheco said. “And with everyone now relying on telecommunications, trucks and trailers are piling up at Commscope’s distribution center here.”
The ‘near shore’ craze
Perhaps more important, Asian supply chain disruptions in the spring accelerated efforts by many multinational manufacturers to “re-shore” their operations back to North America to avoid bottlenecks in the future. Many are looking to set up shop just across the border in northern Mexico in a process known as “near shoring.”

“Everybody is buzzing about companies that left for China in the past and are now bringing their operations back here,” Pacheco said. “For many, it’s too expensive to operate in the U.S., so they want to near-shore their businesses in Juárez and other locations in Mexico. That bodes well for us, because our industrial base supplies those plants south of the border.”
That, in turn, is generating huge interest among real estate developers to build more industrial warehouse and manufacturing space at Santa Teresa.
Dallas-based Blue Road Investments LLC broke ground in June on a new, 315,000-square-foot “speculative” building in Santa Teresa’s Westpark Logistics Center, the newest of four industrial parks that operate in the industrial zone. The Blue Road project marks Westpark’s first spec building, which developers construct before actually lining up tenants in anticipation of growing demand for space.
Franklin Mountain Industrial – which built a 183,000-square-foot spec building in 2018 in Airport Park, northeast of Westpark – just opened a second 183,000-square-foot building in August.
Franklin Mountain executive Brent Harris said lack of industrial vacancy in the El Paso border region, combined with an expected wave in near-shoring, is driving developer interest.
“The El Paso/Santa Teresa region is experiencing unprecedented activity right now,” Harris told the Journal. “El Paso has only a 1.5% vacancy rate in class A spec space, and Santa Teresa has no new vacancy space other than the building we just finished. That creates a lot of opportunity for developers, and I believe we’ll see a lot more spec space being built.”
New faces in town
More firms are also setting up shop at Santa Teresa, and some are expanding existing operations.
W. Silver Recycling, an El Paso-based metal recycling firm with facilities in five states, announced plans in February to construct a 120,000-square-foot building as part of a new processing operation on 60 acres at Santa Teresa. The company has run a 10-acre shipping yard there since 2013, but opted for a much bigger operation now, given the rapid growth and favorable logistics at Santa Teresa, said W. Silver CEO Lane Gaddy.

“All the logistics and space we need are there, including rail shipping and easy access to the port of entry for rapid border crossing,” Gaddy said.
Taiwanese company Admiral Cable, which makes wires, electrical strips and computer parts, is adding three new buildings to its operations at Santa Teresa. And Taiwanese firm Xxentria Technology Materials Co., a global supplier of metal composite materials, said last week it will set up a bi-national manufacturing and distribution operation in both Santa Teresa and the San Jerónimo industrial park just across the border where Foxconn operates.
Xxentria will be the fourth company to open in San Jerónimo, which also includes RR Donnelley & Sons Co. and candy maker Sunrise Convections, which just built a 220,000-square-foot factory there.
A more efficient border
Santa Teresa and San Jerónimo are joined at the hip, with Santa Teresa-based firms supplying materials and components for San Jerónimo operations, and government agencies and private investors collaborating together to build needed infrastructure on both sides of the border. The Santa Teresa Port of Entry, for example, is coordinating with Mexican officials to provide hazardous materials management at the border for the first time this fall, said port Director Fernando Thomé.

“We’re working with our partners on the south side so that everybody gets ready together to manage hazmat services for both north and southbound traffic,” Thomé said.
That could bring more business from U.S. companies exporting fuel products to Mexico.
“We’ve been approached by several companies putting deals together to bring bulk fuel by train from Houston to Santa Teresa, but they need hazmat capability to ship it south of the border,” Pacheco said.
The port offers a rapid alternative to congested border crossings in El Paso, where it generally takes two hours or more for northbound trucks to enter the U.S. In contrast, it takes less than 20 minutes at Santa Teresa, Thomé said.
As a result, northbound commercial crossings reached an all-time monthly record of 13,402 trucks in July. That’s up nearly 50% from July 2015, when 8,957 trucks crossed at Santa Teresa.
Investing in infrastructure
A lot more infrastructure development is underway throughout the industrial parks, including a $20 million addition last spring to Union Pacific’s massive rail yard, a $400 million intermodal transshipment center that UP opened in 2014. UP added a “block swap yard” to load up trains with cars headed to just one destination, avoiding stops at other locations along the way.
Logistics company Ironhorse Resources Inc., which provides rail links from Santa Teresa’s Gateway Rail Park to UP’s intermodal transshipment yard, is also adding another 2.5 miles of linear feed track to its existing rail.
The Doña Ana County International Jetport north of the industrial parks also received $9.9 million in upgrades since last fall. And a new, $2 million pipeline to supply natural gas to businesses in San Jerónimo was recently installed.
All the infrastructure and investment growth makes Santa Teresa an ideal location for developers, said Blue Road co-founder and managing partner Joe Zingaro.

“We started peeling back the layers and saw a lot of really cool, difficult-to-replicate infrastructure that’s very unique,” Zingaro said. “It’s centrally located next to Mexico’s manufacturing capital (Juárez), with a massive (Union Pacific) transshipment center, FedEx and Foxconn all in a couple-mile radius. As a long-term investor, there’s too much to like for us not to do something there.”
Chris Lyons, Santa Teresa’s largest landowner, said the industrial zone is hitting its stride.
“It’s a good place to be right now,” Lyons told the Journal. “It’s still early and there’s a lot of work to do, but we have a good foundation to build on. Santa Teresa is reaching its inflection point.”
Source: “More Firms Are Setting Up Shop at Santa Teresa“

Ikea Is Trying to Follow in the Footsteps of Sears Roebuck in Building its Own Mixed-Use Centers. What Are its Chances of Success?

September 14, 2020 by CARNM

The retailer’s shopping center arm just bought a building in downtown San Francisco. It’s on the lookout for more of the same.

Swedish retail giant Ikea, known for its inexpensive, modern, hard-to-assemble furniture, traditionally doesn’t target urban cores. Instead, it typically builds its warehouse-style stores, averaging 320,000 sq ft., in suburban areas. Now, the Ingka Centres shopping center arm of Ikea’s parent company is starting to load up its U.S. cart with inner-city, mixed-use projects anchored by Ikea stores.
Jeff Holzmann, CEO of real estate crowdfunding firm IIRR Management Services LLC, part of Dallas-based real estate investment firm RREAF Holdings LLC, believes Ingka Centres is embarking on a “smart and brave” strategy by rolling out urban properties in the United States. An Ingka Centres spokesman tells NREI that in addition to retail, components of these mixed-use developments could include hotels or multifamily projects.

The Ikea conglomerate is “doubling down on their core business model and doing so at the right time,” Holzmann says. “The Ikea brand is less conducive to e-commerce, as most people want to see, touch and even experience furniture before they buy it. They want to be inspired by the in-store design, get ideas for what they can do in their own homes and learn about what are the options and prices. That is hard to achieve solely online.”

Ingka Centres’ first project in the U.S. is the long-vacant 6X6 building in downtown San Francisco. The property, with about 256,000 leasable sq. ft., will be transformed into a $260 million mixed-use development. It will include a smaller-format Ikea store, as well as other retail outlets.
Meanwhile, Ingka Centres is scouting inner-city locations in New York City, Los Angeles, Chicago and other North American cities to develop more Ikea-anchored centers. The company, founded in 1972, owns 45 shopping centers in Europe and Asia, with tenants ringing up sales of $7.2 billion in 2019. Retail tenants at those centers include apparel chains H&M, Uniqlo and Zara.
Ingka Centres bought the 6X6 building from MSP Property LLP, owned by Pasadena, Calif.-based Alexandria Real Estate Equities Inc. and San Francisco-based TMG Partners LLC. The new owner plans to debut the Ikea store and the first phase of redevelopment in 2021. This represents Ingka Centres’ second mixed-use project in a downtown spot; the first one is underway at Kings Mall in London.
“Our urban projects are all about getting closer to our customers,” Gerard Groener, general manager of Ingka Centres, said in a news release. “6X6 is an impressive six-floor glass building, with smart modern design and internal areas that provide the ideal canvas to create something truly spectacular. We believe Ingka Centres can transform the performance of well-located assets like 6X6 by aligning their [offerings] to how people want to spend their time.”
The urban approach in the U.S. has the potential to pay off well for Ingka Centres and Ikea, thanks in part to the smaller-format Ikea stores, according to Ryan Wolfe, co-founder and chief operating officer of New York City-based clicks-and-bricks hybrid ShopFulfill Corp.
“For decades, Ikea has raised the bar with their large-format shopping experience. That said, the sheer magnitude, amount of people and singular destination of their flagships can be a barrier to those seeking an efficient, straightforward, low-commitment shopping experience,” Wolfe says. “Uniting the best of what they have created with their flagships with a modern take on an urban mall concept brings their experience closer to customers, which could be complimentary to the brand and expand their presence.”
Holzmann notes that Ingka Centres is entering the U.S. market as consumers are seeking normalcy and “creature comforts” in the midst of the coronavirus pandemic. Shoppers “are actually craving what Ikea has to offer in times like these and are willing to brave a socially distant line just to enter a store wearing a mask so they can come out with a home fixture to improve their lives while spending so much more time indoors,” he says.
Right now, many consumers remain wary of heading to a crowded shopping center. But once the pandemic passes and people feel more at ease about visiting busy public places, developing projects like 6X6 in San Francisco might be “the smartest thing” Ingka Centres could have done, Holzmann says.
Real estate attorney Michael Smetana, a partner in the Chicago office of law firm Culhane Meadows PLLC, likens Ingka Centres’ U.S. plan to one that legacy retailer Sears Roebuck & Co. employed beginning in the late 1950s. Back then, as more Americans were relocating to the suburbs from city centers, Sears set up Homart Development Co. to build regional malls anchored by Sears stores. Homart went on to become one of the country’s most prolific mall developers. In 1995, mall developer and owner General Growth Properties Inc. bought Homart for $1.85 billion.
In both of those cases, the retailer extracts profit from the properties that it occupies, Smetana says. Still, he thinks Ingka Centres might need to rely on joint ventures with mall owners to execute “a quick and effective entry into the U.S. mall market.” But the firm should be able to buy U.S. properties “at a significant discount.”
While Ingka Centres stands to pick up properties on the cheap, Smetana wonders whether it’ll be worth it. He doubts a smaller-format Ikea store will be a “sufficient catalyst” to attract customers to a retail center.
Ingka Centres—whose Ikea-anchored “meeting places” draw more than 480 million visitors a year—is confident its mixed-use projects in the U.S. will succeed, partly because more of its customers now live in urban settings. The company says it’ll be hunting for U.S. properties, such as malls, department stores and post offices, in pedestrian- and cyclist-friendly areas with access to public transit.
“Retail is constantly changing, and it’s more important than ever, particularly during COVID-19, that we continue to evaluate how we can remain relevant in the eyes of our customers,” the Ingka Centres spokesman says. “We are responding to a more omni-channel retail environment and global urbanization trends.”
The mixed-use centers will be retail-focused, the spokesman adds, but will “go far beyond shopping, offering experiences that can’t be replicated online.”
Source: “Ikea Is Trying to Follow in the Footsteps of Sears Roebuck in Building its Own Mixed-Use Centers. What Are its Chances of Success?”

Cracks Emerge in Multifamily Sector Under COVID-19 Pressure

September 14, 2020 by CARNM

“The evidence of some stress does coincide with a multitude of other issues in multifamily.”

A recent analysis by a pair of Moody’s experts highlights what could be the first sign of pandemic-induced stress on the multifamily sector. While the sector continues to hold up better than retail and lodging, the uptick in delinquency for this group is raising concern.
That’s the take on the multifamily landscape in the note titled: “CMBS Newsflash: Emerging Cracks in Multifamily and a CDC Eviction Moratorium” written by David Salz and Thomas P LaSalvia. The analysis dives into the trend of increasing volume of special servicing within the sector as overall delinquency rates have stabilized and even show signs of declining, and why.
The report for Real Estate Solutions for Moody’s Analytics REIS focuses on Commercial Mortgage-Backed Securities (CMBS), a type of mortgage-backed security backed by commercial and multifamily mortgages rather than residential real estate that tend to be more complex and volatile.
Salz leads the Moody’s Analytics CMBS desk within the Structured Content Solutions group, while LaSalvia is a Senior Economist in the Research and Economics Department at Moody’s Analytics REIS.
“In our review of August’s remittances, we’ve noticed some conflicting data, in addition to a multifamily sector displaying its first sign of pandemic related stress,” the two researchers wrote. “While the overall delinquency rate is fairly stable and even showing signs of decline, the volume of special servicing remains stubbornly high and is inching higher.”
Their conclusion: The multifamily numbers should be a cause for concern for what up to this point has been what the authors described as “the darling of the commercial real estate industry.
“In certain cuts of the data, we even see sector-specific conflict in terms where stress is hiding and likely to show up in the near future,” wrote Salz and LaSalvia.
The REIS report compared month-over-month data, focusing on a population that includes loans whose servicer comments contained, among reasons for delinquency, “COVID-19” but were not inclined to “cancel” relief.
Through July and August, loan and balance counts within this population were relatively steady across sectors, based on the data, but the payment status of borrowers with “COVID-19” concerns were escalating.
In July, the report found that a large proportion of “concerned” borrowers were current in the multifamily, office, and industrial sectors. However, the percentage of loans paying on time for multifamily (both agency and non-agency multifamily) decreased in August, just a month later.
“Is this the beginning of growing stress for a sector many consider the darling of CRE?” Salz and LaSalvia ask. “Overall, we expect multifamily to continue to hold up better than retail and lodging, but the uptick in delinquency for this group must be watched. Further, the evidence of some stress does coincide with a multitude of other issues in multifamily.”
Among these ”other issues” likely contributing to the trend includes the expiration of the CARES Act [the Coronavirus Aid, Relief, and Economic Security Act – a $2.2 trillion economic stimulus bill passed by Congress earlier this year and signed into law by President Donald Trump on March 27, 2020 in response to the economic fallout of the COVID-19 pandemic], recently stalled relief packages in Congress over the next stimulus check- if any; and not the least, another half a million people becoming “permanently” unemployed.
Not surprisingly, coinciding with such factors was further decline in on-time tenant rent payments in August, while data collected by Moody’s Analytics REIS through July and August showed asking and effective rent declines for the multifamily sector.
“Moreover, the recent Centers for Disease Control eviction moratorium could spell trouble for landlords and borrowers with thin margins,” said Salz and LaSalvia, referring to the Sept. 2 moratorium signed by CDC Director Dr. Robert Redfield declaring evictions of tenants could be detrimental to public health control measures aimed at slowing the spread of COVID-19.
“There has been some movement in CMBS relief from Congress, but nothing is concrete or imminent. Consequently, the pressure could move towards special servicers, who are already burdened with a multitude of requests from the lodging and retail sectors,” added the authors.
Month over month, the Moody’s report showed only improvement in the lodging sector.
Source: “Cracks Emerge in Multifamily Sector Under COVID-19 Pressure”

Grocery Tenants Help to Prop Up Retail Rents

September 14, 2020 by CARNM

A new report from Moody’s Analytics shows a .5% to .6% drop in US retail rents, a relatively nominal decrease considering the economic shock.

Grocery and pharmacy tenants have helped to prop up average retail rental rates during the pandemic. According to a new report from Moody’s Analytics REIS, retail rents in the US declined .5% to .6% during the pandemic in neighborhood and community retail centers, a relatively nominal drop considering the economic shock. The report attributes this to the fact that many of these neighborhood centers are often anchored by grocery stores or pharmacies, which have not only stayed open during the pandemic but performed well. Ultimately, that has help to keep retail rents up.
Suburban markets seem to be getting hit harder by the pandemic. In the report’s ranking of the worst performing markets, Charleston and Central New Jersey are tied for the top position with rents down 1.8%. Albuquerque came in next with rents down 1.4%, and Ventura County and Fairfield County rounded out the list of worst performing markets with rents down 1.2% and 1.1% respectively.
The report also outlined the markets that have been the most resilient through the pandemic, with increasing rents. Suburban Maryland is at the top of the list with retail rents up 1.8%. Seattle and Tulsa took the next two spots with rents up 1.6% and 1.5%. Finally, Palm Beach and Oakland/East Bay made the top markets list with rents growing 1.3% and .9%.
The outlook for retail rents was much more grim. In June, a report from JLL predicted that retail rents would decrease 5.5% this year due to closures of retail apparel stores and restaurants. However, the same report also predicted a bifurcation of the retail market, with grocery stores and other essential businesses rising up and performing through the economic distress. This report from Moody’s illustrates that trend. However, the report from JLL also included an optimistic outlook that would come with a swifter rebound in consumer confidence. If that were to happen, retail rents would only decrease 2.1%. It seems like consumer confidence has also returned through the summer, leading to stronger rent trends. Overall, retail rents are expected to rebound to current levels in 2022.
It isn’t surprising to see that grocery and pharmacy tenants have helped to stabilize the market. From the onset of the pandemic, many predicted that essential retailers and shopping centers anchored by essential retailers would play a key role in the stability of the retail sector. As a result, tenants like Dollar Tree Stores have continued to sign lease transactions even through the pandemic. However, retail owners have been flexible in working with tenants and providing concessions. As that trend continues, retail rents will likely continue to decline.
Source: “Grocery Tenants Help to Prop Up Retail Rents”