As NAFTA negotiations drag on to an unclear resolution, the Tijuana economy — and its commercial real estate market — faces uncertainty, something no business exec likes. A crippled or dead NAFTA seems like a grim prospect, since the trade pact has probably done more to grow the local economy than anything else since the 1990s.

On the other hand, barring a trade catastrophe, Tijuana’s longer-term prospects are solid as it integrates into the world economy not just as a manufacturing hub, but also as a budding outpost of the knowledge economy.

“We don’t know what’s going to happen with NAFTA,” Tijuana Economic Development Corp. CEO Adriana Eguia Alaniz said. “No one does. NAFTA has been critically important in the development of Tijuana since it was enacted, and it’s still very important, so we’re watching carefully.

“But we’re optimistic that there will be a positive outcome,” Eguia said. “Trade between the countries is too important.”

NAFTA and the new Tijuana economy will be among the transnational topics up for discussion at Bisnow’s Cross-Border Real Estate: San Diego and Tijuana event Aug. 23.

The direction of NAFTA has been uncertain since the beginning of the Trump administration, but for Tijuana investors and developers, the recent Mexican presidential election also generated a fair amount of uncertainty, which is past now, Eguia said, especially the possibility that a new Mexican administration would be less business-friendly than the current one, or more adversarial toward the United States.

Commercial development pulled back briefly during the first quarter, she said. Now that the election is over, Eguia expects development and space absorption will pick up again, just as it has been growing in recent years.

“The binational region has long been successful because of its flexibility,” World Trade Center San Diego Executive Director Nikia Clarke said. “There will continue to be volatility and uncertainty around the trajectory of U.S.-Mexico relations that will impact commercial real estate markets in the short term.

“However, one guarantee is that in the long term our two economies will remain interdependent, regardless of how the rules of engagement change — and the border region is a smart place to hedge your bets,” Clarke said.

Demand for commercial space is being driven in part by substantial direct foreign investment in the Tijuana market. The market is attractive to investors since it has a strong supply of skilled technical workers, a solid logistical infrastructure and serves as a gateway to Latin American markets, NAI Mexico’s Keith Meyer said.

“A company in a competitive regulated field, such as medical devices, can develop its software in Tijuana with a local contracting firm, design hardware prototypes locally, then scale up to full commercialized production levels, all while trusting that their critical intellectual property will be protected,” Meyer said.

These advantages have helped fuel a steady increase in commercial activity in the office and industrial sectors over the past several years in the Tijuana market, he said.

“The demand for high-end buildings has been particularly noticeable, with record low vacancy rates for Class-A space,” Meyer said. Absorption of industrial space in particular in Tijuana has been brisk in recent years, according to NAI Mexico data. In Q1 2016, about 5M SF was available. By Q1 2018, only 2M SF was. Industrial vacancy was 7% two years ago, and by the first quarter of this year, the rate stood at 2.85%.

Tecma inked the largest deal for industrial space in Q1, taking nearly 136K SF in a built-to-suit, representing an expansion of the El Paso-based company’s presence in Tijuana. Tecma helps U.S. manufacturers set up operations in Mexico.

Developers have responded to the strong demand for industrial product in Tijuana. In early 2016, about 800K SF of industrial space was underway in Tijuana. In early 2018, the total was more than 1.4M SF, according to NAI Mexico.

CEO Adriana Eguia Alaniz In recent decades, the focus of the Tijuana economy, and thus local commercial real estate development, has been largely industrial. That is poised to change. Like many other heavily industrial economies around the world, Tijuana is evolving to be more diversified — including tech.

“Tijuana is transitioning to be less dependent on manufacturing,” Eguia said. “Our goal is to attract companies that specialize in software, robotics and AI.”

As a result, office development has ticked up lately. Thirteen projects are now underway in Tijuana, Eguia said, and there is new interest in developing hotels.

The market has some distinct advantages when it comes to tech growth, especially its location as a bridge between North America and Latin America. U.S. tech companies wanting to expand into Latin America have been coming to Tijuana, and Latin American tech companies wanting to expand into the U.S. are also coming to Tijuana.

Being next to San Diego, a rising tech hub in its own right, is important to the growth of tech in Tijuana as well. While Tijuana grows its post-industrial economy, industrial activity will continue to be a mainstay. That is in part because in the 2010s, Mexico became more competitive as a manufacturing economy.

Even before the current U.S. trade imbroglio with China, labor costs in that country were going up and its industrial productivity was lagging. According to a 2014 report by the Boston Consulting Group, Mexico is 4 percentage points less expensive as a manufacturing economy than China, with a manufacturing cost structure that had improved the most of any of the 25 countries that the company tracked.

As the population in both San Diego and Tijuana has grown, the number of international companies moving to Tijuana has grown as well, both to take advantage of its location near the American consumer market but also to be near a highly skilled but relatively inexpensive Mexican workforce.

Tijuana is perhaps best known in U.S. business circles for its contract manufacturing, with roughly 100 companies currently active in making outsourced products for non-Mexican markets. These Tijuana operations include basic assembly, but also sophisticated projects for electronics, medical device, plastics processing, metal mechanics and aerospace production.

Besides contract manufacturers, Tijuana has an active industrial base of its own, with global and Mexican companies making products for domestic consumption and for export worldwide. These include aerospace, automotive and electronics makers.

Mexico’s largest medical device manufacturing cluster is in Tijuana, with over 40 companies that employ about 42,000 workers who produce Class III medical devices. Many familiar players in the industry have facilities in Tijuana, including Foxconn, Medtronic, CareFusion, Fisher & Paykel and Samsung.  Thermo Fisher Scientific, a biotech product development firm, set up a software development center in Tijuana back in 2015.

“People were unaware that Mexico produces almost as many software engineers as the U.S., and were shocked when I said the best I’d ever worked with were from Mexico,” Thermo Fisher Chief Technology Officer Mark Field told Nearshore Americas.

In some ways, Tijuana has become a victim of its own success. As its economy has grown, so has the volume of people and goods crossing the border to the north, which has made congestion at the border a thorn in the side of the local economy.

More than 80 international freight companies operate in Tijuana, and more than 200 trucking companies provide services out of San Diego and Tijuana combined, according to Tijuana Economic Development Corp. data. The Otay Mesa Port of entry to the U.S. is the largest commercial crossing on the border between California and Baja California, with more than 1.4M trucks crossing per year.

Smart Border Coalition Executive Director Gustavo De La Fuente said progress has been made when it comes to making border crossings less time-consuming for individuals and cargo, but there is still much room for improvement in border wait times, access to roads, cargo pre-clearance and other areas.

In 2012, the Southern California Association of Governments and the Imperial County Transportation Commission completed the Goods Movement Border Crossing Study and Analysis to analyze the movement of goods across the border and the issue of congestion.

The study estimated total combined losses of $1.25B for California and Baja California’s economies, along with more than 8,700 jobs that were not created, due to border delays in 2012.

The organizations are currently working on an updated study of the problems associated with border delays.

“The new report might find that the need for improved crossing is even more urgent now because the volume of traffic is higher,” De La Fuente said.

More border crossings are now done via Secure Electronic Network for Travelers Rapid Inspection, or SENTRI lanes. SENTRI lanes are dedicated to pre-approved travelers crossing the border and can be processed at a faster rate than regular passenger lanes. “Now about 40% of all crossers use SENTRI cards, up from less than half that 10 years ago,” De La Fuente said.

“The more people go to the faster lanes, the better, in terms of delays and reducing pollution.” There are tech improvements in the works as well to deal with border congestion, De Le Fuente said.

“Facial recognition at the border, wait-time management, unified cargo processing — that is, both sides inspecting goods at the same time — are all in the works, and already happening at Otay Mesa,” he said. “These are going to expand in the future.”

Eguia, Clarke and De Le Fuente will all be speakers at Bisnow’s Cross-Border Real Estate: San Diego and Tijuana event on Aug. 23 at the Westin San Diego.