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Subject: Executive Update
Date: Fri, 13 Nov 92 13:07:19 EST
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11/13/92


TITLE Executive Update

Commercial Developers Discover Mexican Market

Trade Accord, Economic Boom Draw U.S. Companies Across The Border
Robert Corrigan


The last few years have been nasty for U.S. developers of commer-
cial real estate.  Many have been reduced to minimally profitable
work such as "property management," often a euphemism for simple
maintenance work. So it's no surprise that when a new market
presents itself, builders jump.  That's what's happening now with
Business Abroad

Mexico.  The recent hubbub over the North American Free Trade
Agreement has developers, as well as design firms and other re-
lated enterprises, rushing south of the border to get a piece of
the continuing economic boom there.  "American developers are
bumping into each other in the hotels (in Mexico) right now,"
said Nick Criss, director of Burnham de Mexico S.A., an affiliate
of San Diego real estate services firm John Burnham & Co.  NAFTA
negotiations were completed in August, and the proposed trade ac-
cord should come up for a vote before Congress next spring or
summer.  While the accord as it stands has few items specifically
aimed at aiding commercial real estate, some provisions should
help the market.  The pact's section on banking would allow U.S.
companies to invest in Mexico's banking and insurance industries,
largely closed until now. Foreign companies as a group initially
would be permitted to buy Mexican banks holding up to as much as
8% of the industry's capital, with that cap being phased out com-
pletely by Jan. 1, 2000.  For developers, that could be good
news. Mexico currently has virtually no long-term financing sys-
tem, so most large development programs have had to be financed
with internally generated cash. U.S. financial companies could
help fill that void.  But NAFTA's main contribution for develop-
ers may come through some of the broader provisions - such as
widespread tariff cuts, and the establishment of a panel to
resolve trade disputes - that increase the comfort level for
American business people abroad, says Paul J. DeMyer, a consul-
tant at Kenneth Leventhal & Co. in Los Angeles.

Step Ahead Of NAFTA

Those advantages are still some distance away. But many U.S.
businesses have decided to enter the market ahead of NAFTA's ap-
proval.

Indianapolis-based Mel Simon & Associates, one of the nation's
largest builders of retail space, announced last spring that it
will join with partners to build two regional malls in the cities
of Guadalajara and Monterrey and three other shopping centers in
Mexico City. Total cost: $1 billion.  Among other projects,
ground was recently broken on a $100 million office tower and re-
tail complex in the heart of Mexico City that is being designed
by Baltimore-based RTKL Associates Inc. Donahue Schriber#m#cq#m#,
a Newport Beach, Calif.-based developer, signed up last month
with a Mexican partner to build several shopping malls in Mexico.
Huge Dallas developer Trammell Crow Co.#m#cq#m# has at least
three projects in the planning stages, including a $50 million,
30-story office building in Monterrey.  Many of the projects are
retail-oriented, as developers bet on Mexicans' proven desire for
U.S. products. About 70% of Mexico's imports come from the U.S.,
which sent $33 billion in goods there last year.  With a burgeon-
ing manufacturing sector and an economy growing faster than that
of the U.S., Mexico has more citizens who can afford U.S. brands.

Finding Mexican Partners

William A. Bugg, an executive managing director at Cushman &
Wakefield Inc. in Atlanta, notes that most developers and re-
tailers are hooking up with Mexican developers in joint ventures.
"Mexico's legal system is more contact-oriented than contract-
oriented," said Bugg, whose company last month signed a joint
venture pact with a large Mexican company. "So you need a Mexican
partner to guide you through it." Other big players that have
hooked up with Mexican partners include Wal-Mart Stores Inc. and
Price Co.'s Price Club unit, which already have started building
stores in Mexico City.  Kenneth Prysor Jones, a British ex-
patriot who serves as general director of Grupo Situr S.A., one
of Mexico's largest developers, says there are only "a handful of
major players" among Mexico's developers, and they are fast being
courted by Americans for joint ventures.  Besides the retail
market, resort and hotel development also is drawing interest.
While large American companies like Hyatt Corp. and Hilton Hotels
Corp. have been operating for years in Mexican coastal resorts
such as Acapulco and Cancun, most activity has been confined to
management rather than development.

Undeveloped Beaches


Donald M. Koll, chief executive of Newport Beach-based Koll Co.,
says there are still vast undeveloped beach areas in Mexico that
afford huge opportunities, and presently they have U.S. develop-
ers swarming. Koll, one of the most active American resort
developers now in Mexico, is developing two large projects at the
southern tip of the Baja peninsula.  The office market also is
ripe for development. In Mexico City, the world's largest urban
area with about 20 million people, only two buildings are con-
sidered Class A, or top-rate structures with full amenities, ac-
cording to Bugg. The vacancy rate in the city is effectively
about 1%, says Koll, though other estimates go higher.  Mexico
City is "a huge market of about 70 million square feet (of office
space) that's growing much faster than any city in the U.S.,"
Bugg said. Good properties now can command rents from $35 to $40
a square foot, and some go for much more. That's far higher than
the $23 average rent in Manhattan or $20 in in downtown Los
Angeles.  But Bugg is concerned that things could get out of
hand. Mexican developers already are feverishly putting up all
the offices they can, while Americans just now are jumping in to
provide space for the foreign businesses setting up shop there.

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