Labor costs in California are driving American industrial users south of the border to Mexico, Joe Smith, SVP for CBRE, tells SoCal Real Estate. The firm recently released a report tracking the industrial market in Northern Baja, providing insight into this sector in Tijuana, Mexicali, and Tecate for Q3 2018.
In the report, Smith says, “One of the key drivers that we hear anecdotally from users located in California that are searching in Mexico is that it is becoming substantially more difficult for them to operate economically in the state of California. Today, the main users in the Northern Baja market aerospace and medical manufacturers, so those tenants that are entering are becoming increasingly sophisticated and requiring a greater level of tenant improvements.”
We spoke with Smith about the factors driving California industrial occupiers to Mexico, how operating there compares to operating in California, and where he sees this trend heading.
SoCal Real Estate: What is drawing industrial users to Tijuana?
Smith: It’s labor costs, pure and simple — the delta between the cost of labor in Mexico and the cost of labor in some other market, whether it’s in the U.S. or China or wherever. We actually don’t go to companies in the U.S. and say, “Have you ever thought of going to Mexico?” By the time we meet with somebody, they have already decided to go somewhere offshore and have made the decision to locate near shore, either in Mexico or some other option that involves over the water. We are at the end of the food chain and are pretty much at the boots-on-the-ground stage.
Typically, companies are driven by several different factors besides the labor. They take a look at the costs of moving both raw materials and finished goods, where they’re getting these from, where they’re sending them to, where the mother company is, if they are supplying parts for a final product being assembled in Mexico by a major manufacturer. Where they need to be may get dictated by the end user. In Tijuana, there are several manufacturing clusters: aerospace, medical, auto and general electronics are among them.
Also driving companies to Mexico is quality of life. Almost all of these clients have Mexican management but also U.S. on-site management. They can have their family live in San Diego, their kids go to San Diego schools, and still work in Mexico. That’s a key factor to companies in California: Their employees can play golf, go to the beach, and still have an operation off shore.
It’s a matter of quality control: If something is going wrong in the process, somebody in L.A. could be in Tijuana during the day and sleeping in their own bed that night. If the operation was located in China or Guatemala, it would not be that easy.
Also, it’s a matter of inventory: The difference between being in Tijuana and offshore can be a two-day delivery vs. 14 to 28 days on the water.
How does operating in Tijuana compare to operating in California?
It’s always easier to do business in your own backyard, but many companies have already made the decision that labor costs far outweigh the potential irritants of moving offshore. They’re not really comparing Tijuana to the Inland Empire or L.A.; they’re comparing Tijuana to Monterrey, Bajio, and other areas of Mexico.
Where do you see this trend heading?
The main thrust for the last five years has tended to be companies that already have a footprint in Mexico expanding their operations because of the success they’re having. New entrants are typically smaller in size, and it’s their first foray into a near-shore market. But competition is worldwide. Competitors in certain food groups are driven by the need because other competitors of theirs are in that market. Medical parts is one of the hottest segments of the industries that are locating there, along with aerospace.
What else should our readers know about the Tijuana industrial market?
It’s very tight, and lease rates are typically low by California standards. It’s a very busy market, and most of the names on the buildings are U.S. companies you recognize, in addition to multinational ones. It’s a solid, strong market, and most space is leased before the space is completed.