COVER STORY, APRIL 2005

HANDS ACROSS THE RIVER
Southwest Texas is a dynamic, fast growing industrial market.
Karen Stone, CCIM

On the last leg of its journey to the Gulf of Mexico, the Rio Grande runs through Laredo and then curls through a valley that bears its name. Fueled by the economic incentives of NAFTA (North American Free Trade Agreement) and the booming industrial businesses located in sister communities across the river in Mexico, cities in southern Texas are the gateway that link manufacturers and suppliers to the global marketplace.

The economies of the U.S. and Mexican cities along this border are synergistically linked together like hands and gloves. Because of less expensive labor costs, most goods are manufactured on the Mexican side of the Rio Grande. Finished products are moved across the river into Texas where lower land costs and rents make warehousing and distribution more affordable. The result is diverse economies tightly intertwined from cultural and economic standpoints.

The primary metropolitan areas in southern Texas that lead the way in industrial development are Laredo, McAllen and Brownsville. Each market is unique. And, while they compete to win the favor of the same businesses, they work together to improve the infrastructure needed to support growth.

Laredo

Sitting at the center of the main trade route connecting Canada, the United States and Mexico, Laredo — together with Nuevo Laredo, its sister city across the border in Mexico — is one of the top four ports of commerce in the nation.

Laredo is the second fastest growing city in the United States, falling just behind Las Vegas. Its industrial market is very dynamic…and growing. At the end of 2004, there was a total of about 40 million square feet of industrial space in the market, with a vacancy factor of approximately 7.5 percent. It is estimated that 300,000 to 400,000 square feet of new space will come on line each month during 2005.

Much of the growth has been catalyzed by the activities of the Laredo Development Foundation. John Adams, executive director, says businesses are attracted to the Laredo market because of its unmatched location, a positive business environment, efficient and technically advanced processes for handling goods, and the work community’s hypersensitivity to safety and security issues.

Because of its broad international reach, Adams calls Laredo “a little Hong Kong.” In 2004, Laredo-based businesses did approximately $90 billion in trade with more than 60 countries, and handled logistics for 700 of the Fortune 1000 companies. To hit those numbers, “you have to move a lot of goods,” says Adams. And goods move through Laredo at an incredible rate. On a daily basis during 2004, 9,000 trucks and 2,000 rail cars came, unloaded and went. Laredo International Airport handled 324 million pounds of air cargo per day. “ The key [to moving that volume of goods] is to remain efficient and productive and to take advantage of the expertise of the Laredo community,” notes Adams.

To accommodate growth, The Embarcadero, an industrial park, is currently under development. With more than 500,000 square feet of industrial space completed and occupied, the project is one of the most sought after in the region. Edward Villareal, manager of the Grubb & Ellis office in Laredo, notes, “The Laredo market is dominated by third-party logistics providers, and these businesses will grow as the manufacturing businesses in Nuevo Laredo and other Mexican cities grow.”

Down in the Valley – McAllen and Brownsville

As it makes its way further south through the Rio Grande Valley, the river passes through 26 U.S. municipalities. According to David Allex, owner of Allex Associates International, “The industrial market in the area is primarily focused on producing electronics and automotive products.” Allex and his partner, Merced Perez-Trevino, are industrial specialists in McAllen, Brownsville and other Texas markets. “Businesses are attracted to the area because of our young, highly trainable workforce. Within a 50-mile radius of the center point of the Valley — about the same distance from Fort Worth to Dallas — there are 4 million people,” says Allex. “The workforce is becoming more sophisticated and specialized thanks to the superb educational and training institutions in the area, including Texas State Technical College and the University of Texas at Brownsville,” adds Perez-Trevino.

McAllen

Just over 2 hours southeast of Laredo, McAllen is the fourth fastest growing MSA in the nation. Nancy Boultinghouse, marketing director for the McAllen Economic Development Corporation (MEDC), describes McAllen as “an international community that just has a river dividing it.” The McAllen MSA is currently made up of 560,000 people and its Mexican sister city, Reynosa, has 1.2 million people, for a total of 1.76 million.

Boultinghouse notes, “MEDC has had tremendous success in recruiting for both sides of the river.” To successfully recruit to the U.S. side, they needed to create a critical mass in manufacturing on the Mexican side. Since 1988, MEDC has brought 260 companies to the Reynosa market and 218 companies to McAllen.

Boultinghouse says the growth in the McAllen/Reynosa market is incredible. “In 2005, we are expecting to close 2.2 million square feet on the U.S. side and 2.6 million on the Mexican side.” With approximately 13 million square feet of existing industrial space, vacancy is about 4.5 percent.

“The area will continue to grow because of the economic development effort and the foresight of the city fathers,” notes Boultinghouse. McAllen’s planners are constantly adding to their vision for McAllen. For example, McAllen is carving a niche as a “re-manufacturing” center. “All products that are returned to the manufacturer come through McAllen,” says Boultinghouse. “If it is determined that the products will be reused, they are re-tooled here, redistributed and sold as re-manufactured goods.”

Carlos Marquez, industrial broker in Grubb & Ellis’ McAllen office talks about another trend. “Tier 1 and Tier 2 manufacturers, those that manufacture components, are moving to McAllen.” The components they make are sent to Mexico for assembly. Products come back to the United States for distribution. Marquez continues, “Also, in the last 5 years institutional investors have become more involved in the market and we are beginning to see some spec development.”

The most well known development in the McAllen area is Sharyland Plantation, a 1,200-acre mixed-use planned development. As listing agent for Sharyland’s owner, a division of Hunt Realty Corporation, Marquez notes, “Approximately 900 acres will be a world-class industrial park with state-of-the-art amenities. Four hundred acres are under development now with approximately 2 million square feet of Class A space.”

Brownsville

Industry Week Magazine has listed Brownsville as the sixth fastest growing manufacturing region in the United States. It is also the only Texas border city with a deep-water seaport.

The Brownsville MSA currently has about 8.5 million square feet of industrial space. Vacancy is high (approximately 2.5 million square feet are available) as a result of the loss of textile manufacturing to China and other low labor cost markets. However, absorption is increasing as manufacturing picks up in Matamoros, its sister Mexican city.

In the past several years, the Brownsville Economic Development Council (BEDC) has been successful in recruiting new companies to the area. “One of the niches we see developing is the metal market,” says Orlando Campas of the BEDC. “Because of the Port of Brownsville, one of the major commodities we transport is steel.” There have been some shifts in the market following September 11. “Some companies downsized but productivity still increased because of automation. Because of increased efficiencies, several companies have expanded by adding product lines.”

The future looks bright for Brownsville and Matamoros, with existing companies such as Delphi Automotive, Tyco Electronics, Parker Hannafin and Dana Corporation leading the way.

A Bright Future for Southern Texas

According to John Adams, “Trade is like water — it follows the path of least resistance.” Businesspeople and politicians in the area are committed to making sure the sailing, railing, flying and driving routes are open and hassle free. Their efforts will bring growth to the area and continue to support thousands of jobs in manufacturing cities throughout the United States.

With its unique infrastructure, no natural boundaries to fence it in, and the cultural and symbiotic interplay of the cities that join hands across the Rio Grande, the industrial market in southern Texas is poised for continued significant growth.

Karen Stone, CCIM, president of Stone Consulting Group, is a commercial real estate consultant.

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