First in a two-part series.
The inflation we see first-hand is a result of pent-up demand not being met by supply, due to factors such as increased consumer spending and disrupted supply chains.
The industrial leasing market for value-added production and warehousing in the Borderplex region (El Paso, Juárez, southern New Mexico) is a microcosm of this phenomenon. I recently got to attend a couple of briefings by Christian Perez Giese, senior vice president/director of industrial and logistics at commercial real estate services company CBRE’s Borderplex branch, and picked up a lot of current information about industrial space in the Borderplex.
Speculative space, often referred to as “spec” space, is industrial space a developer constructs without necessarily having a contract with a tenant. The space is built on speculation that upon completion of the space, or shortly thereafter, the developer will recruit a tenant(s) to lease the space. Having spec space available allows developers and communities the ability to offer available product to companies needing to lease space in a relatively short period of time. In many cases, a company cannot wait the nine to 12 months it can take to construct new industrial space and deals are lost.
In Juárez, there is approximately 75 million square feet of industrial space, and active users are currently demanding another 3.6 million square feet. Juárez has been seeing companies from Asia setting up production operations to hedge their risk against supply chain disruptions, trade wars and rising logistics costs. Major Taiwanese companies have established new operations in Juárez or expanded their existing operations. Approximately 4 million square feet was absorbed in Juárez in 2021, with another 800,000 square feet having been absorbed in the first quarter of 2022, the second highest absorption in a quarter on record.
Currently, the vacancy rate for Juárez industrial space is 0.7%, which is a historic low. More than 5.5 million square feet of industrial space is currently being constructed, 3 million of which is spec space. If all the spec space were available today, vacancy rates would only increase to 2.7%, which is still well below typical market equilibrium. This construction activity is a strong leading indicator for upcoming demand in El Paso, Texas, and Santa Teresa, New Mexico. Historically, industrial lease rates have been similar on either side of the border in the Borderplex. However, Juárez has been underpriced for six to nine months, and lease rates are rapidly catching up to those on the other side of the border. Average asking lease rates in Juárez can now exceed $6 per square foot.
There is currently 63 million square feet of industrial space on the U.S. side of the Borderplex. More than 4 million square feet of space was absorbed in 2021. In the first quarter of 2022, another approximately 1 million square feet of industrial space was absorbed, which was a new record. According to CBRE, the vacancy rate in the El Paso region is currently 1.5%. Brokers believe that it could actually be as low as 0.5%, taking into account that some of the available space is functionally obsolete.
At present, there are 2.7 million square feet of spec space under construction, of which 1.5 million square feet is to be delivered in 2022. Of the total new spec space, 983,000 square feet is already leased or has a letter of intent in place. At present, 2.8 million square feet of space is being demanded by active users. Warehousing accounts for the majority of this demand. Transportation, logistics and third-party logistics firms account for more than 80% of recent leasing activity. In Santa Teresa, New Mexico, and San Jerónimo, Chihuahua, (immediately across the border from each other), more than 2.1 million square feet of space is under construction, of which 635,000 square feet is spec space. Lease rates for select spaces can now exceed $7 per square foot.
It could take a couple of years for the supply of spec space to catch up with the demand to return to what would be considered a normal market vacancy rate. If current market trends continue, the Borderplex region could face another 30% increase in rental rates by 2025.
According to Perez Giese, “A lot of land is being sold to new developers entering the market, so new space will be built. The demand for industrial-use land has driven prices to all-time highs in east El Paso. However, the Borderplex still has some of the best industrial land in the West, with prices well below other competitive markets.” The development boom is pushing growth east to Horizon City (far east El Paso) and west to Santa Teresa in New Mexico.
“In spite of land and rent price increases, the cost(s) of living and operating industrial buildings in the Borderplex are still comparatively low, which works to its advantage. In the future, we should see more manufacturing coming into the region that is not necessarily related to Mexico,” states Perez Giese.