Mexican Industrial City
About to Get a Makeover

A slew of new office buildings is on tap for Monterrey, Mexico, an industrial city best known for manufacturing, cement and steel.

About a dozen office buildings are slated to be under construction in the Monterrey area within two years, and the region's prime office market is expected to double in size to about 15 million square feet by about 2012, according to Javier Llaca, senior vice president in charge of northern Mexico operations for Jones Lang LaSalle Inc.

Monterrey's location, about 140 miles south of Laredo, Texas, has made it a popular option for many U.S. and other non-Mexican companies attracted by the lower labor costs. Despite competition from Central America and China, a range of goods from auto parts to appliances and toys are still assembled in the area, creating demand for industrial-manufacturing and warehouse-distribution space. Among the companies with manufacturing facilities in the area: toy maker Mattel Inc. and appliance maker Whirlpool Corp.

As Mexico's growing middle class fuels domestic consumption, Monterrey is viewed by many investors as a key component of a larger nationwide warehouse portfolio that can also serve the Mexican market. GE Real Estate recently paid $350 million for about 6.5 million square feet of industrial space in Mexico, including some in Monterrey.

"Monterrey is a very important gateway into North America and into Mexico," says Joe Parsons, president of North American equity for GE Real Estate.

Many of the new office buildings being built will be located in the wealthy suburb of San Pedro Garza Garcia. Most buildings will contain larger floor sizes than usual and incorporate more glass or granite in the designs rather than the cement that has been more typical in the region, Mr. Llaca says. "The market is going to get more sophisticated," he says, noting that many of the structures will look like those found on the outskirts of Dallas or Austin.

The region faces difficulties. Denver-based Prologis, one of the world's largest owners and managers of warehouse-distribution space, has about two million square feet of industrial space in the Monterrey area, with more in development. Mexico's warehouse buildings are typically in gated developments with guardhouses at the entrance, says Silvano Solis, senior vice president for Prologis in Mexico. Developers in Mexico face a challenge assembling land served by such infrastructure as water, sewer and electricity, he says.

Nonetheless, office construction is increasing as demand has chipped away at a glut of space that was dumped on the market in the wake of the dot-com bust in 2000, according to Ramon Flores, managing director in northeastern Mexico for CB Richard Ellis. Vacancies in prime office space have dropped to about 9.7% in the second quarter from 20% in 2002. Monterrey's office market has lagged behind the region's stronger industrial and housing sectors, but it is beginning to expand again, in part because many manufacturers are choosing to locate offices outside their factories to secure modern amenities such as Internet access, Mr. Flores says.

The improving market comes as the Mexican economy is expected to regain its footing in the wake of last year's presidential election, says Alfredo Coutino, a senior economist for Latin America with Moody's Economy.com. Year-to-year growth in Mexico's gross domestic product slowed to 2.7% in the first half of 2007 from 5.2% a year earlier.

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