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NAFTA boon to Mexican industrial market; New Jersey tops in US.

In Mexico City, NAFTA expectations have fueled a high-demand market for bulk industrial facilities, making them the most expensive in North America, at $7.80 per square foot (PSF), reports the first-ever "Colliers North American Industrial Market Survey," First Quarter 1994.

The Colliers' Industrial Survey collected and analyzed market data from 41 major markets for bulk and research and development (R&D) space in the U.S., Canada and Mexico. The survey defines R&D space as high-image multi-tenant buildings with limited warehousing and loading, lower ceilings than other industrial space and about 50% office or laboratory finish. Bulk space has higher ceilings than warehouse space, large loading bays and limited parking.

The survey found that North America's most expensive market for R&D space was Victoria, British Columbia, Canada at US $10.26 PSF. and a vacancy rate under 1 percent.

Post-recession New Jersey tops the U.S. markets surveyed, with bulk space at $4.50 PSF and R&D costing $10 PSF, and is second only to Mexico City and Victoria in those categories.

"The North American industrial market in mid-1994 is characterized by strong price variations between regions," explains Stewart Forbes, president of Colliers International. "We also are experiencing strong price differential within the same region, based on the type and quality of facility. And while the effects of the economic recession linger in some regions, prices elsewhere have surpassed the peak market of five years ago."

"Supply is the critical factor," adds Forbes. "Construction has been extremely low in the 1990s and demand relatively stable, which is beginning to drive up costs in the healthier markets."


Election Jitters Drive Mexico

The Colliers survey reports that Mexico has been affected by two very compelling dynamics - NAFTA preparations have inspired the growth of American-style industrial parks on the outskirts of Mexico City and beyond, while in the short term, companies have taken a wait-and-see attitude on lease commitments until after the Mexican Presidential elections on August 21st.

Industrial space is by far the fastest growing commercial real estate market in Mexico, which needs modern facilities, since many of its industrial sites are 20-30 years old.

Industrial rental rates in Mexico City - $7.80 for bulk space and $5.50 for R&D - are an average of 20 to 25 percent higher than the average PSF cost for comparable U.S. space.

Industrial Rates Bloom

in Garden State

In the U.S., the least expensive R&D space can be found in Richmond, VA ($4.25 PSF) and Houston, TX ($4.32 PSF). The nation's cheapest bulk space is found in Hartford, CT ($1.75) and Atlanta, GA ($1.85). Also under $2 PSF are Charleston, SC ($1.90) and Houston ($1.92).

Northern New Jersey's market is in a post-recessionary overdrive, following a prolonged slump. The state now leads the country at $10 PSF for R&D and $4.50 for bulk, followed by Cleveland ($9.72) for R&D and Washington D.C. ($4.10) for bulk space.

"New Jersey was among the worst-hit states during the recession, with job losses totaling 300,000," says David T. Houston, president of Colliers/David T. Houston, the state's Colliers owner-member and chairman of Colliers USA.

"New Jersey's economy is driven by consumer spending - we have the largest concentration in purchasing power in North America - and since the recession ended, we've witnessed a 50 percent drop in available sites," says Houston. "The market drivers include optimal location in the tri-state NY-NJ-CT metropolitan area, land scarcity, stringent building standards, consolidation of regional distribution centers, proximity to major interstates, and increased international trade through Port Elizabeth and Newark International Airport."

Houston and Hartford

Least Expensive

Representing the least expensive U.S. bulk space are Houston and Hartford. Most of Hartford's bulk space was built in the 1940s and 50s and has not been modernized, while tenants in Houston benefit from few or no public assessments, permit fees or land taxes. Houston's Class C space is in oversupply, while Class A space, with wider bays and higher ceilings, is in strong demand.

During the recent U.S. economic recession, construction of Class A bulk space was difficult to finance, keeping supply level. Now, as leases run out in various market across the country, Class B & C tenants are trading up to Class A, which is now available at comparable prices.

Western Markets Stagnate

Depending on the U.S. region, the cost of Class A space has not reached pre-recession rental rates. In fact. most regions show stagnation in rental rates. Some western states, led by California, are still experiencing declining prices, the result of slow demand and the high cost of workers compensation, labor costs and environmental compliance. One bright spot in the California industrial market is the heavy use of 20,000 to 40,000 square foot warehouses by the Asian business community.

Back East however, price growth is indicated for the mid-Atlantic region, which along with the Midwest has rental rates that equal pre-1990 numbers.

Industrial Market

a Lagging Indicator

The Colliers survey found that industrial space markets, particularly in the Midwest, were hit by the impact of the recession much later than office markets. Companies often found it too difficult to sublet a portion of their large bulk space at the beginning of the recession, trying instead to ride it out. As times got tougher, the companies would then release the entire space on the market.

Looking ahead for the remainder of 1994, the Colliers Industrial Market Survey sees an acceleration of the trend in most U.S. markets toward relocation/consolidation into large regional distribution centers. As demands for corporate productivity surge, such facilities offer reduced capital costs, operating expenses and labor efficiencies - bottomline requirements for the 90s.

"Another major trend in most markets is the flight of B and C tenants to comparably priced Class A industrial space," predicts Forbes. "This trading up eventually will lead to a shake-out in some markets, with owners upgrading where feasible to retain tenants, while the demand for higher quality space could help revive some dormant development projects."

Canadian Market Dynamics

Low construction activity is a major cost driver in the Victoria market. Of the North American industrial markets surveyed, Victoria is one of the smallest. It also is comparably less manufacturing-intensive than eastern Canadian cities, while facing geographic constraints and a shortage of available sites for industrial development.

"Generally speaking, the west is best if you're a Canadian landlord," says Forbes, noting that such cities as Calgary, Vancouver and Edmonton have shown no slippage in industrial rental rates. Bulk space rental rates in Toronto and Montreal continue to decline as a greater number of heavy industrial and manufacturing sites become available.
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Title Annotation:North American Free Trade Agreement effect on industrial real estate market in Canada, Mexico and the United States: 'Colliers North American Industrial Market Survey', first quarter 1994
Publication:Real Estate Weekly
Date:Jul 13, 1994
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