TEXAS SNAPSHOT, JULY 2005

El Paso Industrial Market

Located at the westernmost tip of Texas, bordering both New Mexico and Old Mexico, the city of El Paso is the state’s fifth largest city. From a market standpoint, El Paso is often grouped with sister cities Juárez, Chihuahua, Mexico; and Santa Teresa, New Mexico. Together, the three-city region has a combined population of more than 2 million residents and forms the largest international border community in the world.

The industrial market in El Paso is seeing a steady increase in activity, an increase not seen since fall 2000. “The increase in activity will help to lower our vacancy rates, which had increased due to many factors, but most significantly was the overall economic downturn across the United States in and around 9/11,” says Adin Brown II, a principal at Sonny Brown Associates LLC, a real estate brokerage and consulting firm in El Paso.

Another contributor to the increase in vacancy rates from 2002 through the spring of 2004 stemmed from U.S. companies outsourcing to China instead of Mexico to fulfill their manufacturing requirements, according to Adin Brown. “This movement toward China caused new industrial developments in El Paso to be put on hold and the industrial development became very conservative in 2002, 2003 and into spring 2004,” says Will Brown, a principal at Sonny Brown Associates LLC.

Though trends in industrial development in El Paso have remained conservative since May 2004, increased activity across the border in Mexico points toward a boost in activity in El Paso during the next 18 months. “The dramatic increase in manufacturing buildings currently being leased, built or sold in our neighboring sister city Juárez is a positive sign that corporations are again looking strongly to Mexico as an alternative to China,” says Adin Brown. Manufacturers are finding that their flight to cheaper labor markets in China has given rise to transportation and supply problems, prompting many to return to the U.S.-Mexico border.

With its outstanding workforce, industry diversification, broad base of support companies for manufacturers and location at the center of the United States-Mexico border, the El Paso/ Juárez/Santa Teresa region is considered the hub of distribution channels for raw materials and finished products.

Electrolux of Sweden has just completed a 1.1 million-square-foot plant in Juárez, which will have a tremendous impact on both El Paso and Santa Teresa. Electrolux’s worldwide supplier base is considering moving closer to the company’s new location, as evident by recent studies revealing that more than 150 suppliers have visited El Paso, Juárez and Santa Teresa during spring 2005, according to Adin Brown. “The chances are extremely high that the vacancy rates in the three-city area will begin to drop significantly with the influx of Electrolux suppliers relocating to the area,” says Adin Brown.

The four developments seeing the most industrial activity are Vista Del Sol Corporate Center in east El Paso, Verde Corporate Center/Pan American Center for Industry in southeast El Paso, Northwestern Corporate Center in west/northwest El Paso and Santa Teresa Bi-National Park in Santa Teresa. New developments are going up in these submarkets due to their close proximity to bridge crossings into Mexico, an abundance of land, easy access to and from Interstate 10 and Loop 375, an excellent workforce and exceptional infrastructure.

The 58 million-square-foot El Paso industrial market has seen tremendous growth over the past 20 years. In 1984, the market comprised approximately 12 million square feet of industrial space, and over the next two decades, developers, warehouse distribution companies and manufacturers have combined to increase the industrial market five fold during this period. Several established industrial developers in the El Paso area include ProLogis Trust, Five Star Development, Buzz Oates Companies and Plexxar Development.

ProLogis Trust began developing in El Paso in 1991 and has become one of the leading providers of distribution facilities and services in the world, with more than 1,970 facilities owned, managed and under development in 70 markets throughout North America, Europe and Asia. The developer owns 3.8 million square feet of industrial space in El Paso and has recently broken ground on two new facilities in Juárez.

Established in 1978 and currently the largest local developer in El Paso, Five Star Development owns more than 6 million square feet of industrial and retail property in El Paso, Socorro, Laredo and McAllen, Texas, and Juárez. In East El Paso, the company has recently completed two 200,000-square-foot speculative state-of-the-art industrial buildings and it continues to explore numerous alternatives for growth throughout El Paso’s various industrial submarkets.

Buzz Oates Companies has owned industrial facilities in El Paso since 1980 and is one of the largest privately held commercial development companies on the West Coast. With an industrial portfolio in El Paso totaling more than 2.5 million square feet, the company has constructed more than 60 million square feet of industrial properties throughout the West and Midwest.

Plexxar Development has recently acquired more than 425 acres in the exclusive Northwestern Corporate Center submarket of El Paso. Other notable developers in the area include East Group, Industrial Realty Group, Archon Group, IDI, Northwest Mutual Insurance, Covington Capital, Lincoln Life Insurance and Saab Development.

Verde Realty/Verde Corporate Realty Services is a well-capitalized investment/development group in El Paso. The company was founded in 2002 by William Sanders (founder of ProLogis Trust/Secured Capital Group) and Ronald Blankenship. Verde has developed or acquired more than 6 million square feet of industrial properties across the U.S.-Mexico border, and since spring of 2004 has been in the process of playing an active role in El Paso, Juárez and Santa Teresa, strategically purchasing/ developing land and facilities on both sides of the border at or near key border crossings located adjacent to the Zaragosa Bridge Crossing in southeast El Paso and along the southern New Mexico-Mexico border crossing known as the Santa Teresa International Port of Entry.

Most industrial properties in the tri-city area are state-of-the-art, tilt wall, concrete buildings that are conducive to a broad sector of potential users with simple or sophisticated warehouse/ distribution needs. Tenants can find space ranging from 10,000 square feet to 1 million square feet.

The major types of tenants absorbing space in El Paso are a variety of manufacturers, warehouse/distribution companies, light-assembly manufacturers, transportation/freight forwarding companies, third-party logistics providers, supplier types and companies storing both raw goods and finished product for distribution.

In Northwestern Corporate Center, Schneider Electric and Mediflex Corporation have leased a total of 392,000 square feet and Glazers Wholesale Inc. purchased 135,000 square feet. Stanco Metal Products Inc. and Pennant Molding Inc. have leased 60,000 square feet and 30,000 square feet, respectively, in the Santa Teresa Bi-National Park. Vista Corporate Center/Five Star Technology Park Phase II has seen much activity with Bosch, Via Systems, Toro Corporation, Tyco, Airsystem Components Inc. and Pro Trans International leasing a combined 975,000 square feet of space and NCED Inc. purchasing two properties totaling 234,000 square feet.

Leasing rates in the El Paso area range from $3.35 to $4 per square foot for Class A and B buildings with the rates varying depending upon location, interior facility improvements and property age. Triple net charges fall between $1.10 to $1.35 per square per year. Current industrial vacancy rates for Class A and B space were hovering around the 10 to 11.5 percent range as of second quarter 2005.

“The tri-city region comprising El Paso, Juárez and Santa Teresa offers the best technological resources, educational institutions and research facilities on the U.S.-Mexico border,” says Irving “Sonny” Brown, founder of Sonny Brown Associates LLC. “The area will continue to benefit from favorable global production trends and rapid population growth for many years to come.”

El Paso is also poised for a substantial economic impact with the expansion of the U.S. Military Base at Fort Bliss, which is anticipating the arrival of nearly 4,000 additional soldiers and their families by the end of this year. And with the wave of recent Base Relocation and Closure (BRAC) announcements, Fort Bliss could end up with 20,000 to 30,000 soldiers in the next few years. “The economic impact of this base expansion could inject billions of dollars into the economy while helping to bring more defense- and technology-related industries to El Paso,” Will Brown says.

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