GlobeSt.com EXCLUSIVE: More Developers, Investors Testing Mexico

DALLAS-Bird-dogging opportunity across the Mexico border, US-based industrial developers and institutional investors are crossing over in increasing numbers, but their biggest challenge is understanding business practices and cultural differences that can make or break a deal.

"Figuring out how to begin was the biggest challenge," says Amy Powell Exton with Chicago-based LaSalle Investment Management, whose firm broke into the market five years ago. Equally challenging is trying to "translate the way we do business" into Mexico's legal and cultural structures, she adds.

But, investors and developers alike agree that getting their arms around the differences translate into rewards south of the border. They're measuring returns with cap rates pushing 12% on average versus the 7% or lower that now prevail in the US and Canada.

Lorenzo Berho of Grupo Vesta advises US developers pick up a good Mexican partner, have exit strategies in place and "avoid the spring break syndrome." Unlike the US, Mexico isn't a land to invest, grab the gain and get out right away. The experts all agree cultural values mandate longer term holds.

And when it comes to leases, Exton says the best bet is a US-denominated pact instead of a peso-adjusted agreement. It's important to realize each deal gets sealed with English and Spanish contracts--and the Spanish version is the one used to determine the outcome of a dispute, she says. There is no treaty governing disputes, but negotiations are held to determine jurisdiction for adjudication.

"Going in early on in the development process, you'd want it in dollars and US leases," Chicago-based Ridge Property Trust's chairman and CEO James Martell tells GlobeSt.com. "We're getting good credit and not taking foreign currency risk."

In the past seven years, Ridge has developed 1.2 million sf on the US side in McAllen's Sharyland Plantation. Across the Rio Grande River, it's completed a 30,000-sf build-to-suit in Reynosa. Martell says it's now time for a serious push into the country. The firm is up against one other US developer for a 50-acre developable site in Reynosa. If Ridge wins the bid, a 100,000-sf spec warehouse will rise. "This is our first major step," he says. "We're going to be optimistically cautious. We're feeling good about the economy and the opportunities."

Martell says Ridge is able to enter the country without a Mexican partner because it's spent seven years nurturing relationships on both sides plus it works with a specialized Grubb & Ellis Co. team and an NAI affiliate in Reynosa. "We understand the political lay of the land," he explains. "With what we already know and our contacts, we're comfortable we can execute deals." One year from now, the goal is to finish one spec project and at least one build-to-suit, he says.

Martell says he wishes the move into Mexico had been made five years ago. Cap rates then, he says, were 16% or 17%. Ridge is getting in the door at 12%. In another five years, he predicts it will be much like the US is today: 7%.

ProLogis and Hines have tilled the fields of Mexico for several years. CalPERS has made its move into the country and AMB Property Corp. has emerged as one of Mexico's largest buyers of existing industrial product. And for the first time in several years, GE Capital Mortgage Corp. has competition after sticking around when others left in the mid-1990s. It six-year track record racked up $2 billion in deals, all secured by long-term, dollar-denominated leases. "Mexico is one of the places where GE is making money," says Luis Gutierrez of G. Accion.

The hyped-up attention to US-Mexico border development can be partly attributed to "the shakeout of chasing the cheap labor in China," says Claude Billings, vice president of Verde Corporate Realty Services, recognized in industry circles as being the latest creation of William D. Sanders, the force behind LaSalle Partners and then Security Capital Corp. of Greenwich, CT, which spawned 18 REITs, including ProLogis.

Sanders, teaming with C. Ronald Blankenship, formed Verde about two years ago, setting into motion a multi-cultural company with the financial clout and built-in relationships to develop both sides of the border from the Pacific Ocean to the Gulf of Mexico. "Competition is always there," says Billings, who left Denver and ProLogis for the El Paso-based Verde. "Our goal is to be a leading provider of space on both sides."

El Paso, Santa Teresa, Juarez, Laredo, Nuevo Laredo, McAllen and Reynosa have nearly 141 million sf on the ground. Verde's stake is 3.9 million sf in 31 properties and a land bank for another 7.8 million sf. There's also 21,000 acres for a master-planned development in Santa Teresa.

"Most people think you've got just sweatshops in Mexico," Billings says. "It's very sophisticated here. There's an elevated level of technological competence." The bargain-basement labor shifted to China, allowing the maquiladora industry to mature to the next level, he says. China's getting low-cost production; Mexico's reaping assembly; and the US border operations are handling global distribution. "If North America is going to be a leader in manufacturing, we've got to participate in product-sharing," Billings stresses.

Michael Allen, president and CEO of McAllen Economic Development Corp., just finished work yesterday on this year's latest border tally. Reynosa has 15 commitments from companies planning to build 1.6 million sf; nine deals pending for 1.6 million sf; and 15 site evaluations pending for two million sf. On the US side, McAllen alone has six committed companies, totaling 585,677 sf of development; four deals under negotiations for 135,871 sf; and five prospects for 350,000 sf. "These are strong numbers compared to last year," Allen says. If all deals are fulfilled, Mexico will gain 13,970 jobs and the US, 357. But, he says, that's par for the course. "For every three jobs created in Mexico, we create one job in the US," he says.

As for concerns about the border unrest in Mexico, all agree it's not directed at business. "We're in Mexico every day and we never have any problems," Allen stresses, "and the companies we work with don't have any problems either."