Industrial Transformation in Ciudad Juarez: New Constructions Adapt to Post-Pandemic Construction Price Increase

Industrial warehouses' core & shell features have evolved in response to the pandemic across various parts of Mexico, primarily in Ciudad Juarez. Over time, the increase in construction costs and the surge in supply chain expenses have led developers to scale back on aspects such as evaporative cooling systems. This adjustment has allowed builders to reduce construction expenses and pass some of the costs onto tenants, who, in many instances, now invest in modifications previously included in the basic infrastructure of the buildings.

The demand for cooling is significant in Ciudad Juarez, which is known for its desert climate and high temperatures. The removal of evaporative cooling systems impacts not only the base rent –which varies according to the quality and features of the warehouse– but also the operational costs for tenants, who must now invest in alternative cooling systems to maintain an appropriate working environment.

Presently, between 20% and 27% of industrial warehouses entering the market in this region enclose evaporative coolers in their base rent, according to Jaen Pena, General Director of Colliers in Ciudad Juarez. The remainder might include basic features such as office space, lighting, hydraulic concrete paving, dock equipment, and fire and security systems. However, there are exceptions. Pena, who has over 14 years of experience in the industrial market, notes, "There are some developers whose core & shell buildings do not include docks and dock equipment, and even offices and lighting." Moreover, he highlights that developers have recently reduced office space from 5% to 2%.

This situation results from the economic effects following the global health crisis and regional tensions between supply and demand in markets where institutional practices are not as established or are less uniform. A prime example is the behavior of some tertiary markets, which have lower transaction volume, fluctuating demand, and less standardized business processes than primary or secondary markets. In these settings, adaptability and flexibility in negotiations become essential tools for developing and occupying industrial spaces. In such markets, developers and tenants often find common ground in informal talks that determine each party's level of amortization and capital investment.

Regarding tenant improvements (TIs), developers' flexibility in negotiating characteristics translates into a greater willingness to negotiate leases that include specific improvements or allow tenants to make their own modifications more freely. This is especially true in markets where the demand for spaces tailored to specific needs has increased, like in the logistics sector, where space and functionality requirements vary widely.

On the other hand, regarding building improvements (BIs) made by developers, there has been a trend toward optimizing warehouses' core & shell features to keep costs at a minimum while offering the possibility of adding specific improvements negotiated with each tenant. This includes, for example, basic site preparation and essential infrastructure, leaving other aspects like the installation of advanced cooling systems or the customization of offices at the discretion and expense of the tenant.

The dynamics of TIs and BIs, reflecting an evolution in the relationship between developers and tenants where customization and flexibility have become key elements, also present clear benefits, such as more efficient space use and the ability to adapt properties to the operational needs and economic capacity of each tenant, increasing their appeal in a competitive market. However, this also carries disadvantages, such as a potential lack of standardization that can complicate future reconfigurations or reoccupations of spaces, in addition to potential challenges in managing expectations and the clarity of agreements between developers and tenants.

These adjustments in the industrial real estate market must be viewed in the context of a significant increase in construction costs, marked by a 32% rise in input prices from February 2020 to February 2024, according to data from INEGI. This increase, which includes a 2.3% rise between February 2023 and February 2024, underscores the importance of strategies that mitigate financial impacts for developers and tenants. While adaptability and customization offer operational and market advantages, they must also be carefully considered to balance rising costs with the need for efficiency and functionality, ensuring that industrial real estate development remains viable and sustainable amid economic fluctuations or uncertainties.

For more information on trends in Mexico's commercial real estate market, explore SiiLA REsource or contact us at contacto@siila.com.mx.