Episode 5: Industrial Real Estate Costs in Mexico
In this episode, host Ricardo Rascon and David McQueen build on their previous conversation. After focusing in the last episode on manpower costs in Mexico, Ricardo and David shift their attention today to discussing real estate and building costs in Mexico.
To begin, David clarifies that foreign individuals and corporations can acquire and lease property or buildings just the same as Mexican nationals can. In some markets, however, commercial properties are closely held and owners often favor leasing income over selling new real estate. The most common scenario for industrial manufacturing is in an industrial park. Typically, the shelter providers operating the park will offer a wide range of shared services for employees. He also shares what leases in Mexico look like compared to American ones. Then, David identifies the key things companies should look for when searching for a building or piece of land. In terms of cost, industrial facilities should consider proximity to unskilled labor, access to transportation lanes, security and services, and utilities. Generally, unskilled workers in Mexico are not very mobile. Mexican employers of choice are required to provide transportation for employees. When it comes to services and utilities, companies should be on the lookout for the availability of sufficient electricity, water, and gas. This includes what is provided in the building itself, as many will not have a significant amount of power. In most cases, a Class A building in Mexico will meet your requirements as an industrial user comparable to operations elsewhere in the world. Dave gives an overview of what these buildings typically look like.
Finally, David shares insight into what these spaces will probably cost. Like everywhere else, the location in Mexico really matters. Purchase prices will vary depending on the market and the condition of the location, but in many markets, you will find a decent industrial building for around $22 USD per square foot. In closing, he offers final advice for someone looking to purchase in Mexico.
Thank you for joining us on Manufacturing in Mexico!
Read this blog post to learn more about leasing industrial real estate in Mexico.
Speaker 1: Welcome to Tetakawi's Manufacturing in Mexico podcast, where we talk to internal and external experts to provide you with news, insights, and best practices about doing business in Mexico. Whether you're thinking about expanding into Mexico or already there, this podcast will provide you with the information and advice you need to launch, operate, and thrive.
Ricardo: Hello and welcome to another episode of our Manufacturing in Mexico podcast. On our last episode, we talked about manpower costs in Mexico. And today, we're going to talk about real estate and building costs. So how are you doing today, Dave?
Dave: I'm good, thanks, Ricardo.
Ricardo: Great. Well, first question, and it's one that I get often, can foreign individuals or companies buy property in Mexico?
Dave: Yes, generally there are a few restrictions on acquiring land near the border or the coastline. For the most part, foreign individuals and corporations can acquire or lease land and buildings the same way that Mexican nationals can. And foreign-owned Mexican companies have the same rights as Mexican-owned companies when it comes to purchasing real estate assets. In some markets, however, commercial properties are closely held and the property owners often favor income over selling their real estate. So if they don't want to liquidate their assets, they're interested in the income, you may be in a situation where it's difficult to buy property in that market, but you can lease it. And in fact, that's one of the reasons why leasing is a very popular choice. And because of that, there's a healthy competitive leasing market in Mexico. So yes, you can buy property individually and as a corporation. However, for manufacturing operations, you probably want to consider a leasing option in a lot of markets as a first choice.
Ricardo: Okay. And what is the industrial real estate landscape look like in terms of properties and buildings in Mexico?
Dave: Well, there are standalone sites and there are properties available that use standalone sites. But the more common scenario for industrial manufacturing is some kind of an industrial park, which hosts a number of buildings, a number of companies. Some of these have multiple developers in a particular park who then in turn lease or sell their holdings. Others will be the property one developer, or it may be a shelter operating the park, and they may only offer a leasing option or they may offer some blend of leasing and purchase options. It varies. The amenities in the park tend to differ as well. Some parks are pretty bare bones, really just property owners and tenants are required to provide most of their own services. And they may not even be gated or they may not have full utility services installed. So really just a group of property that are available.
But in other cases, the services can be very extensive and comprehensive. Perimeter security amenities that are shared, there's a variety of things that could be offered by an industrial park. Shelter providers, as I mentioned, operate parks, and they typically provide a wide range of shared services. Some of the examples include common employee transportation systems, medical and recreational facilities, or controlled entry and security services. So the range is wide, and depending on who you're working with and what your preference is, there's a lot of different varieties of parks out there.
Ricardo: And what does the process look like in order to lease or buy building a property in Mexico?
Dave: It's very much like the United States or most industrialized countries. The leaseable area of your facility is going to include mezzanines and inside and shelter docks, that's used to calculate the area as well. The lease and purchase agreements are, however, going to be in Spanish, and they're going to be governed by Mexican law, and that's even if they include an English translation. So if you have an English translation of a lease, still it's the Spanish version that is the master when you lease property in Mexico. Those leases are going to have terms very similar to what you're accustomed to in other jurisdictions, so going to look very similar. Leases are often denominated in US dollars. Not every landlord expects US dollars, but many do. Some offer a choice. And then there are some that are going to expect to be paid in pesos.
Leases are triple net for commercial properties gain. That's common in most other jurisdictions. Taxes, maintenance, and insurance are extra to the value of the lease that you're quoted. Five to seven year term is fairly typical. And some brokers and developers are going to add taxes, maintenance, and insurance to the lease, some others are just going to require the tenant to provide evidence of payment. That varies a little bit. Common area or park fees, we mentioned that parks are the most common choice, well, common area or park fees often apply in a park, and that may even be for owners of buildings. Those fees will vary depending on what's provided by the park. They may be lower or nil if there's very few services. It there's a lot of services, they may be a little more. And lease rates are usually quoted per month per square foot or per square meter, rather than as an annual number.
Ricardo: Great. I know this isn't something that's very common now, but what about land available through incentive programs?
Dave: Well, you're right, Ricardo, it's not very common anymore. It was at one time, but it can still be found. And it can be worth a look, but it's usually only worthwhile if you're a very large property purchaser, if you're looking for a very large space and you're a large employer. The land that's offered is often remote. So you need to factor in the cost of accessing the land and servicing it. And you need to make sure of title, including indigenous rights. There have been cases where indigenous groups have rights to land and owners have found that they in fact don't own in the land.
Ricardo: So what should companies look for when they're searching for a building or a piece of land?
Dave: Well, for industrial facilities, I think the following are the key things to look for before thinking about terms and pricing. First of all, proximity to unskilled labor. Secondly, access to transportation lanes. Third, security and fourth, services and utilities.
Ricardo: And obviously access to transportation and security are pretty clear, but can you elaborate a little more on the importance of proximity to unskilled labor?
Dave: Yeah. Unskilled workers in Mexico are not very mobile, generally speaking. They often don't own a car or they're not prepared to use their car to go to work. Public transportation's often not great. Being close to the workers is important, both from the point of view of recruiting and then from the point of view of transporting those workers to your factory. In Mexico in general, the employer's going to transport workers to their factory. If they don't do that, by the way, they're not an employer of choice. Not every employer does it, but employees like to find employers that will transport them to work. If you're close to the employees you're going to employ, it's going to be easier to recruit them. It's going to be easier to transport them to work.
Now, one of the ways you could do that is that there are large housing developments of low cost housing part of government programs in Mexico. If you've been to Mexico, you've seen these large developments of low cost housing. Being in close proximity to those is helpful. But in lieu of that, you have to think about transportation. And so if you're closer to the clients, to the people you're going to hire, then it's going to be lower. In the case of our clients, those that are close to where the employees are hired from may be looking at something like $35 per employee per month, US, for transportation costs. Those that have to transport employees further away because they're in a remote location might be looking at something like $120 per employee per month. So it varies considerably as well as being more or less attractive to the employees.
Ricardo: Interesting. And so going back to when you talked about services and utilities, what are the main things a company should be looking for there?
Dave: Well, the main thing is availability of sufficient electrical power, availability of water, and availability of gas. Those are the primary ones. There may be other issues for certain companies. When I say availability of sufficient electrical power, Mexico has a good electrical grid system, but you have to look at your particular location. Is the power distributed to that location? By the way, voltage and amperage are the same as the US. But do you have distribution to the location? Are you going to be expected to pay for distribution to that location and perhaps transformers and so on if it's not available? That includes getting down to what's provided in the building itself and on the site itself. Most buildings are not going to have a significant amount of power in terms of the base building. So you have to look at who has to upgrade that and what's required to upgrade it.
With water, you have to remember the water generally supplied through the mains is not potable. That's not a big deal. You can get filtered water for potable water and so on. But it's an important point to remember. And again, the availability is going to be the issue. Is there enough coming through the mains and are there restrictions on use? And if it needs to be more, are you going to be the one that has to pay to upsize mains or upsize the supply? Now, in many cases in Mexico it's not going to be an issue, but you need to be aware of it, particularly if your property's remote.
Finally, with natural gas, it is really just simply an availability issue. Natural gas in Mexico is easily available in a lot of places, but it's not distributed throughout the entire country. So you can be in a location where natural gas simply isn't available. And if that's critical to your process, then you want to know whether it's available or not. And once again, who's going to connect it? Is it supplied to your property? Is it supplied to your building or are you responsible for that?
Ricardo: Perfect. And looking at the availability of existing buildings in Mexico, I know that it's a pretty tight market right now because of the influx of foreign direct investment, but what do existing buildings look like? Can you describe what the likely availability is?
Dave: In most cases, a class A building in Mexico is going to meet your requirements as an industrial user. It is going to be a high quality building that would be comparable to what you would choose to operate in elsewhere in the world. There may be some class B buildings that might work, at least for warehousing or some very simple manufacturing. But generally speaking, you're going to want to stick to class A and look at those properties. Multi-tenant is very common and a wide range of sizes as well, often with the ability to connect multiple units. But there are some markets in Mexico where there aren't a lot of small footprint buildings, even in multi-tenant scenarios. So when you get under 25,000 square feet per unit, you may find the selection is reduced depending on where you're located. If you're over 25,000 feet, there's probably a lot of options.
The most common, by the way, is a six inch floor with wire mesh. There are many industrial processes that's not a substantial enough floor loading for them. And typically a bare building is not going to have any support for crane wastes or any kind of rooftop installation. It's not necessary in Mexico to have a roof strong enough to take a snow load. So upsizing columns and so on is not very common. So if those requirements are important, you either need to install separate foundations in the building as part of your leasehold improvements or you need to deal with a build to suit situation to upgrade.
It's also common to have minimal lighting and electrical service. Typically you're going to need to upgrade the transformers and provide additional lighting either as a leasehold or capital investment. One of the things that you need to be aware of is that the electrical utility requires a one time demand fee of approximately a hundred dollars US per KVA above 200 KVAs. In many cases, that will also be a fee that you need to pay in order to get a large enough transformer in the building. And finally, it's common for dock levelers and overhead doors to be manually operated in Mexico. So if you do require powered dock levelers or powered doors, you factor that into your thinking. And the same ventilation, typically in the bare building there's no standard ventilation in the floor, no powered ventilation. Once again, depending on, well, if you're going to put people in there, any number of people, you're going to need to put some ventilation in. And if your process requires more ventilation, then factor that into your thinking as well.
Ricardo: And what about office space, Dave?
Dave: A standard is usually three to 5% of the footprint. Most buildings will come with three to 5% of their overall area as finished office. Most developers offer a basic level of finish that can be occupied without any improvements, including air conditioning that is in the office area. Typically, if you require a basic level of finish, drywall walls, some tile floors and so on, and some air conditioning, that's going to be provided. If you need more office space or you want different finishes, then again, that's going to be either a lease hold improvement or a capital investment on your part.
Ricardo: And what are my options if the existing buildings don't meet my needs?
Dave: As in other markets, you can do leasehold improvements. Those can be additions to ventilation, lighting, service finishes, office space, trenches, foundations, whatever it is you require. They maybe amortize into the lease by the developer, but you can't assume that they will. Some developers in Mexico do not have access to a lot of capital beyond their investment in their assets, and they will not amortize any leasehold improvements. You can have a situation where you've got to invest in all of them on your own. In other cases, the developer will agree to amortize leasehold improvements into the leases. You generally find the developer will permit internal changes at least that are not financed by them without any significant restrictions, provided you invest your own money and provided you return those to the original state when you vacate the building. That's similar to most other jurisdictions.
But a lot of parks and some multi-tenant buildings do restrict external changes to the building, particularly as they affect appearance. So you need to be aware of that. And then finally, the things you're almost always going to need to pay for out of your own pocket include distributing your services, connecting your machinery and equipment, and ventilation within the building, security within the building. It's inside the building. And all the process related features like foundations, trenches, overhead cranes. And again, this is not dissimilar to most markets. Finally, some developers are not going to finance any improvements, as I mentioned, so you need to be aware of that and make sure you understand what are you getting in the bare building, what are you getting as common park services, what are you allowed to do on your own, and who's going to pay for it.
Ricardo: And what if I want a lease, but my requirements can't be met by anything that's on the market right now?
Dave: A lot of build-to-suit options in Mexico, and a lot of developers still do a build to suit and lease back. So that's a common choice. There's some excellent companies out there that will do that and provide high levels of customization and still provide the lease hold option or lease back option. So that's certainly something that could be done.
Ricardo: Great. I think we've covered a lot with respect to industrial real estate in Mexico, but what does it cost? What can I expect to pay the lease or buy industrial real estate in Mexico?
Dave: Well, and no surprise, the axiom about real estate applies in Mexico like everywhere else, location matters. So not only the city you're in, but the neighborhood and the proximity to services, and so on, are going to affect the price. In effect, the range can be wide in any given market. But triple net lease rates in Mexico for industrial properties could be as low as 30 cents US per square foot per month, and could be as much as 95 cents US per square foot per month. Average prices though, say 35% of the lower cost markets, maybe 55 cents per square foot in the higher cost border areas, something like that. I realize it's a large range, but gives you a bit of an idea. Taxes, maintenance, and insurance typically add between one and a half and three and a half cents per square foot. Again, as we talked earlier, that depends on what the landlord's providing and what the tenant's providing. Common area or park fees, maybe two cents to three cents per month per square foot, again, depending on amenities.
And then leasehold improvement costs are going to vary depending on what you do of course. But at minimum for most manufacturing buildings, you're going to need some improvements to lighting and ventilation, maybe a little bit more power. So you're probably looking at something along the lines of budgeting three to 10 cents per square foot or the equivalent amount of capital for leasehold improvements. Now, if you need process improvements, well that's going to be beyond that. And if you need foundations, trenches, things like that that are specialized, then you need to budget for them beyond that. If you decide on the purchase option, there's a lot of variation of purchase pricings depending on the market and the conditional location. But also, as I mentioned, how liquid that market is. Is it a market where there's a lot of vested interest who don't want to liquidate their property and therefore there's really not much available? So prices can range significantly higher or lower. But in many markets you can get a decent industrial building for something like 22, 60 dollars US per square foot, that's a typical range of purchase cost.
Ricardo: Perfect, thanks for that overview there. So say I'm ready to expand into Mexico and I'm looking for real estate. What are the next steps, Dave? What's the process that I should follow?
Dave: Well, the first thing is, do you want to lease or do you want to buy? I think the next thing to do is do some homework on your location. Find out about the neighborhoods, find out where the labor source is going to be, what are the transportation links like, and that sort of thing. The more specific you can get, the easier it's going to be for someone to help find you the building that you need. There's lots of people who can help. Obviously, like other markets, there are brokers and developers. Brokers, by the way, a lot of the international brokers, Coldwell Banker and people like that operate in Mexico. That's a good route to follow. There are developers who market their properties directly and can be very helpful. Shelter providers, of course, not only provide parks and buildings in some cases, but also they can be an ideal link between developers and brokers, and locating the property that you require. And finally, government sources can be helpful in terms of providing lists of brokers, developers, properties available, that kind of thing.
The last thing I'd say is get some Mexican legal advice before signing your lease. Remember, it's the Spanish version that governs. And a lease or an agreement to purchase, you want to get competent Mexican legal advice before you go ahead with that.
Ricardo: Perfect. Well, thanks a lot again for your time, Dave. I think you did a good job of just laying out what companies need to consider once they get to the point of selecting real estate in Mexico. Thanks again for your time, and thank you all for listening. On our next session, we're going to just wrap up costs. Last session, we talked about labor costs, today, real estate. Next session we're going to talk about utilities, miscellaneous costs, and most importantly, startup costs that you need to consider when expanding into Mexico. Be sure to tune in then, and thank you all again for your time.
Speaker 1: We appreciate you joining us for this session of the Manufacturing in Mexico podcast. For more information and resources about how to succeed in Mexico, be sure to visit our website, Tetakawi.com.