Pacheco: Trends at border a harbinger of what’s to come for US economy

EDITOR’S NOTE: This is first in a two-part series about the Borderplex region. Part two will come out next Sunday.

I always say that the border is a harbinger of what will happen in the U.S. economy.

Tracking industrial space, industrial jobs and global trends is critical in understanding what is going on at the border and what this portends for North America.

I recently interviewed Christian Perez Giese, executive vice president and director of CBRE, a commercial real estate organization, in El Paso to gain insight in these areas in the Borderplex region: Juarez, El Paso and Santa Teresa.

Tell me what happened in the industrial space market in Juarez, comparing 2024 to 2023.

Very little happened in 2024 compared to 2023. Our main indicator that CBRE uses is net absorption. It’s the occupancy of new space minus the vacancy of space and for the record, we do not count space under construction in our vacancy numbers. Last year, we did slightly more than 2 million square feet of net absorption of industrial activity and in 2023 more than 6 million square feet, so it was down.

Is that an indication of the market slowing down?

Absolutely, and my thesis is that the market actually started slowing in 2022 because of the expectation of an oncoming recession, which didn’t occur.

Previously, from an industrial real estate perspective, the time of a client making a decision to lease or purchase a building to CBRE’s research team recording net absorption was roughly six months. Now, what we’re seeing is more sophisticated manufacturing buildings and the timeline for construction is two years or longer.

The recent Taiwanese investment in Juarez is a good example of these more sophisticated buildings. Pegatron has a building in Juarez that’s been under construction for over two years. The decision to expand production in Juarez was probably a year-and-a-half before that. So, these timelines are being elongated.

I believe that what we saw happen in 2023 were actually decisions that happened before COVID and then were executed coming right out of COVID in 2021 and then that space was delivered in 2022 and 2023. We’re dealing with an extraordinary lag in Juarez because of the more sophisticated nature of the buildings — their more sophisticated manufacturing operations.

Are there decisions being made now that we’re going to see happen, let’s say in 2026, 2027?

No, we’re not seeing any decisions happening right now.

Is this also reflected in the El Paso and Santa Teresa market?

El Paso and Santa Teresa are acting differently than we would have expected.

The core client in Juarez I describe as the global 2000 manufacturing firm, doesn’t have clarity to make a decision on installing a new multimillion dollar, multi-hundred-million-dollar facility in Mexico today because of the geopolitics that are going on and because of the tariff conversation. I just don’t think there’s a foundation for making new investments decisions.

Today, we’re seeing some investment announcements happening in Mexico and it’ll be interesting to see when those announcements get converted into actual transactions. One major company is Tesla, which made an announcement for Monterrey, but Tesla hasn’t done anything.

In your report, you cite that industrial space in Juarez has grown from approximately 67 million square feet from the first quarter of 2017, to 97.6 million square feet by the end of 2024. This is a 45% increase, or 5.6% a year. Is this considered healthy or normal?

No, it was very rapid growth. We were seeing it in the industrial market across North America, so it wasn’t unusual in Juarez, Santa Teresa or El Paso, but it was unusual if you take the post-COVID snapshot for industrial and look at it at any point over the last 40 years.

In El Paso, during the same time period, it grew from 56.2 million square feet to 76.8 million square feet. That’s a 36% increase, or about 12.25% a year. Same kind of observation?

Yes, although on the U.S. side of the border I generally believe that our community has a 10-year lag culturally, socially and from an industrial, real estate perspective.

I don’t think that we have seen the full effect of the industrial boom that started 10 years ago in the U.S. and in central Mexico and that was really e-commerce driven. We have two large e-commerce facilities here that are a big part of our market, but it was really just two actual transactions, compared to what is driving any major U.S. market or even Mexico City, Guadalajara and Monterrey to a degree where you have a lot of e-commerce and fulfillment operations.

We’re starting to see companies that are making more sophisticated distribution decisions out of El Paso, but it’s not necessarily e-commerce driven because effectively we’re an island and have to consider one-day or even one-hour delivery timelines. We just don’t have a big enough population to have a huge boom in the e-commerce, last-mile segment.

Your report states that industrial space in Santa Teresa grew from 2.9 million square feet to 5.8 million square feet. That’s a 98% increase, or a growth rate of about 4.5% a year.

There’s a lot going on in Santa Teresa. We never talk about how the growth of Chihuahua City has been huge for Santa Teresa because I believe that most of the products from that region are crossing at Santa Teresa rather than going through Juarez.

And then you’re having some companies that are using their local supply chain and local logistic networks out of Santa Teresa into Juarez, rather than competing with the Zaragoza Bridge in east El Paso. The bypass of the Zaragoza Bridge I think is increasingly important. You have a couple of large transactions and they have an outweighed impact on the starting point at the 2.9 million square feet data set.

What about the vacancy rates in Juarez, El Paso and Santa Teresa?

They’ve gone up dramatically since the low rates in 2022 and 2023. They are following a trend in the U.S. and they are also getting back to a historical average. It’s happening more quickly than we’ve seen in the past, but it’s basically getting back to a balance.

In the U.S. market, our historical vacancy rate is 9.2% and we’re at 9.5% at the close of 2024 in Juarez and El Paso. Santa Teresa is included in our El Paso data. The historical average in Juarez is 7.2% and we’ve rebounded to 8.3%, so slightly ahead.

How much industrial space was delivered in Juarez, El Paso and Santa Teresa in 2024 and how does that compare to 2023?

It’s coming down. It was just over 6 million square feet in that was delivered in Juarez last year, and it was roughly 8.5 million square feet in 2023. In El Paso, 5.3 million square feet was delivered in 2024, and that was actually slightly above about 4.5 million square feet in 2023. El Paso has not slowed down on construction projects.