NAFTA: DOING BUSINESS IN MEXICO : U.S. Builders See Big Opportunities Developing : Real estate: Commercial, residential projects could be lucrative--but not overnight.
U.S. real estate companies hope to be among the biggest beneficiaries of the North American Free Trade Agreement, even though the complicated trade pact offers their industry little in the way of direct help in penetrating markets to the north and south.
Growing personal incomes in Mexico should lead to more spending, experts say, which bodes well for U.S. home builders and commercial developers whose efforts to gain a toehold in the potentially lucrative market south of the border have so far met with only limited success.
A boom in manufacturing could fuel demand for warehouses and factories from Guatemala to the Yukon. And real estate agents hope to capitalize on the trade agreement by bringing American-style service to Mexico and the U.S. citizens doing business there.
American developers see more opportunities to the south than the north. Canada is already highly developed and has had a free-trade agreement with the United States since 1989, but U.S. builders say passage of NAFTA will eventually remove many of the obstacles that have prevented them from tapping into Mexico’s promising real estate market.
“Developers look at Mexico today and it reminds them of what America looked like in the 1940s and ‘50s,” said attorney Fred Allen of Allen, Matkins, a Los Angeles-based law firm that represents several U.S. builders involved in projects in foreign countries. “The growth potential is that good, for everything from housing to shopping malls.”
But while U.S. real estate companies that have been doing business in Mexico agree that NAFTA should make projects there even more attractive, they’re warning competitors that big profits won’t come overnight.
“We started doing deals in Mexico in the ‘80s and now it’s paying off,” said Jim Watson, president of Newport Beach-based Koll Co.’s international commercial development division. “But there’s a big learning curve you go through before you start getting projects up and running.
“Builders who think they’re going to go down there and make a quick buck are sadly mistaken,” he said.
Ironically, passage of the North American Free Trade Agreement--which is scheduled to take effect in January after receiving final approval by the U.S. Senate on Saturday--comes as office vacancy rates in many of Mexico’s largest cities are rising, and the nation’s economy has paused to catch its breath.
Just a year ago, the office vacancy rate in Mexico City was a mere 1%; now it’s 10% and climbing, said Pedro Ascue, who runs Chicago-based LaSalle Partners’ leasing operations in Mexico. While 10% seems low compared to the average 14% vacancy factor across the United States and the 22% rate in downtown Los Angeles, it has already caused some landlords to slash their rental rates by as much as 20%.
“The Americans who are planning to come here won’t be arriving in the best of times,” said Ascue, who has been leasing space out of his Mexico City office for more than a decade. “NAFTA might improve things, but building here and turning a big profit is no longer a slam-dunk.”
Still, other California developers are joining Koll in leading the charge south, in part because they’re so close to Mexico and because the real estate market in their home state remains soft.
“Mexico’s economy is strong, and it’s got three times the number of people that California has,” said Chad Dreier, chief financial officer of Los Angeles-based Kaufman & Broad Home Corp., the state’s biggest builder. “With demographics like that, you can’t really ignore it.”
Kaufman & Broad began setting up shop in Mexico about a year ago and has already targeted a large parcel outside Mexico City for a community of at least 200 homes. Dreier said the company’s financial strength and ability to mass-produce homes should give it an edge over some Mexican-owned developers, who don’t build such large tracts.
Some Southland-based commercial brokerage outfits with operations in Mexico say their business has already picked up as U.S. firms start planning to move or expand south.
“We’ve been getting calls from companies all over the country asking about the availability of office space and manufacturing space down there,” said Dave McKenney, managing director of broker Cushman & Wakefield’s downtown Los Angeles office.
McKenney said the Mexico City brokerage firm his company started through a joint venture with real estate conglomerate Fondo Opcion about two years ago has already become one of Cushman & Wakefield’s fastest-growing revenue producers--a trend that should continue under NAFTA.
Like Cushman & Wakefield, many other American companies are testing the waters by linking up with established Mexican firms through joint ventures. The Americans have long lists of past clients looking to expand, while the Mexicans have the experience and connections to get the job done.
“We’ve been impressed with the way we’ve been welcomed down there,” said Linda Williams of Newport Beach-based CB Commercial International.
