For e-commerce giants like Amazon and those that hope to keep up with Amazon, the old model doesn’t work anymore. E-commerce is generating incredible demand for industrial space, as online sellers seek to reduce their shipping time to virtually nothing. Millennials, in particular, are putting a high priority on quick shipping times, as nobody under 30 feels like they ought to wait more than 2 days for anything. This has created incredible demand for “last mile” warehouse hubs in every city — and sometimes multiple locations within a metropolitan area. E-commerce retailers are buying up and/or leasing industrial space as fast as they can, and now account for 20 percent of new industrial leasing, up from 5 percent just a few years ago. “E-Commerce only makes up about 10 percent of current sales, when it comes to the total retail market, but it’s the distribution of goods in such a short time frame that’s been a huge driver of absorbing space,” says Parker Schultz, Sales and Leasing Associate for Pacific Coast Commercial in San Diego. “This means that to succeed online, it’s necessary to put a large warehouse in every major city, and the increased demand for industrial space is driving lease prices through the roof.” Rent prices per square foot have increased 7.6 percent in Los Angeles in the last year, and are even worse on the East Coast – New Jersey reports an 11.6 increase in rent prices per square foot, and the demand shows no signs of slowing down. “In small manufacturing, there’s been a big demand, because we see lots of people that have been inspired to open their own businesses,” says Schultz. “You see the small businesses competing in almost every different sector, absorbing all this space. in the San Diego market, anything below a few thousand square feet can rent as high as $1.60 a square foot, which is almost double what the rate was a few years back.” This is pushing manufacturers to consider other options, like Mexico.

Brownfield Reclamation

Some companies, in an attempt to combat the rent hikes, are exploring brownfield reclamation — the cleaning up of vacant, condemned or contaminated properties—, but this is an expensive and risky option that many businesses balk at. According to Parker Schultz, “it’s a lot of labor and cost, with uncertainty, because you don’t know that that work will come to fruition.” It’s possible to find prime brownfield sites in some cities, where old factories were once built near residential and retail centers, such as Ross Perot Jr.’s project to turn an old coal plant into the new Victor Center, where the Dallas Mavericks play. But this is a great example of when and how brownfield reclamations projects work, and when they don’t. It’s a viable option if you can turn the reclaimed land into a basketball arena, or shopping center, where the prime location of the contaminated land — near downtowns, subway stops or along stretches of waterfront where factories once employed hundreds of workers — gives it incredible value potential. It’s not such a great option for manufacturers, where the location doesn’t add as much value, and may actually create more issues.

In addition, any brownfield reclamation project is a roll of the dice. Cleanup projects are expensive, and often turn up even more issues than originally anticipated. Costs go over budget on a regular basis. For Vestar, who took on a brownfield reclamation project in Tempe, Arizona, the project cost $25 million more than anticipated. And any time the EPA and environmental groups get involved, the potential for costly and time-consuming lawsuits increases exponentially. “There’s lots of liability in [brownfield reclamation], because you can have one report that says you’ve cleaned up properly, and then when you go to sell your asset, if someone can discover even the smallest remnant of chemical or oil spill or environment hazard, that could jeopardize the entire project and cause substantial liability for owners – and buyers,” reports Schultz. Cleaning up a brownfield can garner you good press, making you look like a community-minded environmental crusader, but it only takes a hint of a doubt for the public to turn on you. If cleanup doesn’t go as planned, or even a rumor gets out that it isn’t being done properly, perception can change from “cleaning up someone else’s mess” to “cutting costs and putting employees and community at risk.”

Mexico is Easy

As a result, many manufacturing companies, both large and small, are looking across the border for industrial space. There are many advantages to setting up manufacturing operations in a border city like Tijuana, such as a highly skilled and educated labor force. According to Christian Carrillo, CEO of Atisa Industrial, the average manufacturer moving into their Tijuana based park “saves, on average, $2-$4 million dollars per year for every 100 employees.” That’s significant savings, especially as U.S. lease and property prices just go up and up, with no end in sight. Freeing up that much liquid capital to fund things like R&D or shareholder returns and significantly benefit a company in a competitive marketplace.

Many manufacturers are finding that outsourcing to Mexico has many advantages over sending their businesses to China. Proximity makes effective oversight much easier and simpler, which is a big factor for technology products for whom quality control is paramount. “Given the expansion of the healthcare sector, the oversight necessary to produce the quality necessary for these medical devices that might go into people’s bodies is very high. So you need a skilled, educated labor force, that can make quality products while at the same time, maintaining a level of affordability” says Schultz. Mexico also has much stricter intellectual property laws, keeping manufacturer’s patented technology from being stolen by competitors, a problem many companies have run into in China. And there’s plenty of labor available. According to Rob Hixson, Senior VP of SIOR, “ the northern Baja labor market has good demand, but supply of an excellent workforce is available, at rates below half of the Southern California market.” And, of course, it’s always nice to be able to conduct business during business hours, and Mexico is in the same time zone as the U.S. West coast (and only a few hours different from the east coast,) so there’s no need for middle of the night meetings.

As industrial real estate markets continue to tighten in the United States, smart, creative and resourceful brokers will do well to investigate options in Mexico for their clients. Mexican options are increasingly attractive and viable, whether the client is a small company based in California or a larger one in South Carolina. Looking longer term, the anticipation of a U.S. recession makes the area even more attractive as it will offer a safe haven to businesses looking to reduce costs in order to stay in business.