Manufacturing Is Booming—South of the Border

Ecommerce has become the principal, or at least the most fervent, driver of industrial activity in the US and particularly in Southern California, which is home to some of the country’s tightest industrial markets. While ecommerce is dominating industrial activity here, manufacturing activity is still booming—south of the border. Mexico has picked up much of the industrial manufacturing business, and as a result, the North Baja industrial region is seeing record-breaking stats. According to research from CBRE, the North Baja industrial market has a 3.5% vacancy rate, more than 1.7 million square feet in the construction pipeline and rising rental rates, now at $0.45 per square foot.

Low labor costs and the availability of labor is driving the manufacturing activity in Mexico. “The driver is really labor costs. Labor is less expensive in Mexico than it is here,” Joe Smith, SVP at CBRE, tells GlobeSt.com. “There is less reliance in the US on trade schools today, there used to be a lot of trade schools in the US. Today, there are many trade schools in Mexico teaching specific trades. A lot of companies are finding that there are educated and sophisticated employees in the market as well, and there are sophisticated manufacturing capabilities in Mexico that people understand. It is not only entry-level positions.”

While labor isn’t a surprising driver of the industrial market—especially for manufacturing users—one might have assumed rising rental rates and limited availability of industrial space would have lured manufacturing users across the border. However, Smith says that rents in the Northern Baja market are competitive with Sand Diego and other parts of Southern California. “Rents in California are not pushing people south,” says Smith. “There are cheaper areas in California than there are in Mexico. The rents in Northern Baja are less expensive than they are in the Southern California region, but in parts of the Southern California region, like the Inland Empire, rents are competitive.”

In addition to manufacturing companies, manufacturing suppliers and vendors are also major users in the Northern Baja market. “The users are all high labor manufacturers or the suppliers to those manufacturers, like 3PLs or public warehousing,” says Smith. “Many of the manufacturers require just in time delivery of subassembly parts and raw materials. So vendors need to deliver goods two to three times a day.”

With such close proximity to the border, much of the product is exported into the US, while exports heading to South America are typically produced in Southern Mexico. “The bulk of the product comes north, although it could go south to South America,” says Smith. “Typically, if we were establishing a company, we would establish it in a location that was most convenient for shipping to its ultimately location. Location is driven by three things: where my raw materials come from; where my product goes to; and if I am shipping subassembly parts, where my mother company is. Those are the drivers in terms of the location.”

With such high demand and a shrinking availability rate, the North Baja market has a healthy construction pipeline, and the quality of product mirrors the product delivered in Southern California. “The product in the US is influencing product in Mexico,” says Smith. “When company owners from Chicago or L.A. shows up, they want 32-clear height. Many manufacturers don’t need more than 15- or 20-foot clear height. There is a lot of US institutional development expertise in Mexico, so you see can’t tell the difference between the buildings there and here.”