Border-Town Warehouses Are Booming as More Manufacturing Moves to Mexico

Date: Thursday, February 9, 2023
Source: Wall Street Journal

Real-estate investors are betting that big changes in global supply chains will boost demand for warehouses and distribution centers in Mexico and U.S. border towns.

American and some foreign companies are shifting production and equipment to Mexico in pursuit of a manufacturing hub closer to the U.S. Many are relocating from Asia after a series of disruptions related to China during the pandemic, part of a burgeoning “nearshoring” trend.

Some big owners of the industrial properties are following these moves. Prologis Inc., the world’s largest logistics real-estate company, said that demand is surging for locations in Mexico, while investors such as Morgan Stanley are focusing on warehouses in U.S. border towns in places such as Texas and California.

“Today we’re seeing companies manufacturing goods in Mexico and using north of the border for distribution,” said Lauren Hochfelder, co-chief executive of Morgan Stanley Real Estate Investing, which is investing in developments totaling about 2 million square feet of space.

Industrial space overall has been one of the hottest sectors in commercial property for much of the pandemic, fueled by e-commerce demand. The sector hit a few bumps last spring after Inc. said it was throttling back on its e-commerce operations. 

But rents and occupancy levels remained high throughout 2022, thanks partly to the modernization of the supply chain designed to avert shortages and improve efficiency, said Michael Carroll, head of U.S. real-estate research for RBC Capital Markets.

More companies are willing “to hold more inventory because the loss of a sale is of greater risk than the extra cost of holding the inventory,” he said.

Shifting supply-chain routes offer a relatively new wrinkle in the industrial sector. Foreign direct investment in Mexico was $32.1 billion during the first nine months of 2022, the most for the period since 2013. In January, leaders from the U.S., Mexico and Canada agreed to strengthen regional supply chains at the North American Leaders’ Summit in Mexico City.

Prologis said it owns about 44 million square feet of industrial space in Mexico. Last year, the company broke ground on a record 4 million square feet of new supply in the country, while occupancy reached 98% in the fourth quarter. Nearshoring-related expansions and relocations accounted for one-half of the marketplace demand in 2022, particularly in Monterrey, Juarez and Tijuana.

Demand for business in Mexico last year “was the highest ever and positive trends continue,” said Chris Caton, Prologis’s head of global strategy and analytics.

Nearshoring also is creating new demand for logistics properties in cities such as El Paso and Laredo, Texas; San Diego; and Tucson, Ariz., according to real-estate investment firms. Big firms like TPG Inc., CBRE Investment Management and Clarion Partners have either invested in property in the region or are close to making this bet.

New industrial supply tied to Mexico was especially strong in 2021, when logistics space increased by 6% in El Paso and more than 4% in Laredo compared with 2020, according to CBRE. Supply continued to grow last year, though it tapered off partly because higher interest rates increased the cost and the return objectives for investing new capital, industrial-space companies said.

As manufacturing shifts south of the border, demand for industrial space is also rising on the U.S. side for some goods, such as electronics and medical devices. These components are often manufactured in Mexico but need a more skilled labor force for final assembly.

End users also want warehouses and distribution centers in the U.S. in order to avoid shortages in the future that might result from political problems or tensions along the Mexican border.

Some logistics companies and manufacturers began examining the possibility of moving plants to Mexico from China in the years leading up to the pandemic because of rising costs in China. Many of these plans accelerated as Covid-19 created bottlenecks in ports and other supply-chain disruptions.

“The catalyst was the break in supply chains due to Covid,” said Mr. Caton of Prologis.

Mexico also looks attractive to global manufacturers concerned about trade tensions between the U.S. and China, the war in Ukraine and other geopolitical issues. Many consider the political risks in Mexico from such things as President Andrés Manuel López Obrador‘s efforts to reclaim control of electricity generation to be less worrisome.

“Nearshoring in Mexico better guarantees an efficient supply of goods,” said a spokeswoman for CBRE Investment Management.

[Read from the original source.]