Global Real Estate Update: Latin America

A four-tower, Class A, 1.2 million-square-foot office complex?built speculatively. Such a concept might be unheard of in the United States these days, but developers are breaking ground on just such a project in Sao Paulo, Brazil.

In a vote of confidence for Brazil's economy, despite its proximity to and its relationship with the flailing Argentine market, Tishman Speyer Metodo and Deutsche Bank AB broke ground on the first phase of Rochavera Plaza, located in the Marginal area of Sao Paulo, at the tail end of 2001. The first two buildings of the complex should be ready for occupancy by November 2003. Deutsche Bank might take space in its new project in the future?its largest Latin American office is in Brazil.

With companies such as Microsoft Corp., Compaq Computer Corp. and MasterCard International Inc. maintaining regional offices in Sao Paulo, it made sense to start such a project.

Ironically, U.S.-based Tishman Speyer Properties, which formed the joint venture Tishman Speyer Metodo with the Brazilian company Metodo Engenharia, initially scouted locations in Buenos Aires for the development.

"Whether or not Argentina was a good bet was a much harder question to answer a year ago," said Katherine Farley, senior managing director at Tishman Speyer Properties, which is an equal equity partner with Tishman Speyer Metodo and Deutsche Bank for the Rochavera project. "Deutsche Bank came down and looked at both markets and prudently projected that Brazil would be a more stable environment. By the time we were negotiating the equity investment by Deutsche Bank, it was summer and it was very clear that Argentina was very volatile."

Brazil, which depends on Argentina for 15 percent of its exports, has historically been economically tied with its neighbor in the minds of many investors. In past years, though, it has been laboring to separate itself from Argentina, particularly after the dissolution of the trading alliance Mercosur?composed of Argentina, Brazil, Paraguay and Uruguay?in 1999. In January, Argentina owed $141 billion of public foreign debt, its main stock index, Merval, had fallen 29 percent, and it had an unemployment rate of more than 18 percent, not to mention the fifth new president since December, Eduardo Duhalde.

However, with the recent devaluation of the peso in Argentina, signs point to a reopening of trading borders and a possibility that Argentina and Brazil will again link their economies, a policy that might prevent corporate real estate executives, who are secure with Brazil, from expanding into either one. For example, companies such as Cleveland-based Eaton Corp. are currently steering clear of Argentina's woes but will put up real estate in Brazil. Eaton, a manufacturer of automobile and truck parts, has established three manufacturing facilities in Brazil, even though labor costs are equivalent in Argentina.

Farley noted that Tishman Speyer Properties has enough confidence in Argentina's future that it formed a joint venture and purchased land in the Puerto Madero section of Buenos Aires. For now, though, construction is on hold.

Meanwhile, construction on Rochavera Plaza is moving forward. "This is very exciting for us," said Pamela Meisel, director in the real estate private equity group at Deutsche Bank. "This is the first investment we're making in Latin America outside of Mexico. We looked at what happened in real estate projects during the Brazilian devaluation (of the real in 1999), but despite the economy, real estate still held up and rents have recovered about 80 percent of the way. Even if there is some medium- to short-term dislocation in the market, real estate will hold up."

Indeed, in 2001 Brazil grew 2.4 percent in gross domestic product and garnered $24 billion in foreign investments. It received $150 billion in foreign investments over the past five years, and according to the National Confederation of Industry, Brazil was in second place among emerging economies on a scale tracking progress of industrial productivity in the 1990s.

On the flip side, not everyone is cheery about Brazil. For example, Exxon Mobil Corp. contracted with Binswanger International to handle a number of dispositions there. Chris McLernon, executive managing director for Latin America at Colliers International, which maintains three offices in Brazil, foresees an increase in vacancy for the office markets. "It's quite shocking to see that there's so much construction in Sao Paulo," he said. "Looking at our numbers based on historical absorption, we see there being a problematic vacancy rate in the next 18 months because we just don't see the demand to fill these buildings."

But vacancy rates remain low in the city, where nearly 80 percent of the country's wealth is concentrated. At 8.8 percent in third quarter 2001, they grew only slightly from 7.6 percent at midyear, according to CB Richard Ellis Services Inc. And they were down from a year earlier, when they measured nearly 10 percent. Asking rates have been rising in the city, with the average lease rate at the end at R$49 per square meter per month in third quarter 2001, an increase of 2 percent from midyear.

Companies such as Microsoft, Duke Energy Corp., Compaq, Ford Motor Co., Monsanto Co., MasterCard and Booz-Allen & Hamilton Inc. all have addresses in Sao Paulo's Torre Norte, currently the largest commercial space in Brazil and also developed by Tishman Speyer Properties and Tishman Speyer Metodo. Torre Norte exemplifies the bustling Brazilian economy: It was delivered to Sao Paulo 70 percent pre-leased and remains 100 percent occupied, mostly by blue-chip multinational companies. It is owned by Brazilian pension fund FUNCEF.

And the rising real estate demand is not only from U.S.-based companies. "As soon as projects start coming out, we start hearing a lot of interest from the local companies and businesses," said Daniel Citron, CEO of Tishman Speyer Metodo.

This is particularly true in the rapidly tightening Rio de Janeiro market, he explained. "Local companies in Rio are using such old, bad properties?there isn't even air conditioning in some of them. For so long there has been no development activity in the local sector, but with the new oil activity, things will pick up."

In anticipation of international oil companies moving to Rio, Tishman Speyer Metodo acquired land for a 1 million-square-foot office project in the land-constricted city. Rio's Class A buildings were only 0.4 percent vacant at the end of third quarter 2001, according to CB Richard Ellis, one of the lowest vacancy rates in the world, and the average asking price increased by R$2 per square meter from midyear 2001. In order to compensate for the tightening market, Citron noted, some companies are moving toward a growing submarket, Barra de Tijuca, an area 40 minutes from Rio with cheap land prices. But he predicted it will take some years before it becomes a commercial real estate market for international corporations.



America's Darling

Brazil is surpassed in popularity only by Mexico, which has long been the favorite of U.S. corporations wanting to invest in Latin America. Although there has not been a large amount of new activity, with so many U.S. companies continuing to do business in Mexico, real estate executives are following them. Jones Lang LaSalle Inc., for example, operates facilities management offices in Sao Paulo and Rio de Janeiro and a small facilities management group in Buenos Aires but employs approximately 185 brokers and 85 project managers in Mexico, primarily in Monterrey and Mexico City.

Service providers are not the only ones seeking business in Mexico. Investors are also following the corporations, with GE Capital Corp. and the Dutch bank and insurer ING Group shopping for Mexican real estate, particularly with interest rates down to 7 to 8 percent. GE Capital has invested $1.2 billion in loans and leveraged that money to buy properties, and ING acquired Mexico's largest insurance company, Seguros Comercial America, and is developing a financial conglomerate.

"All these guys are chasing high-margin opportunities," said Pedro Azcue, president & CEO of Jones Lang Lasalle?Mexico. "There's a lot of opportunistic capital looking for already-leased bargains, but that's going to be very difficult to get in this environment. There's too much money like that chasing not very many opportunities."

Another buyer was New York Life, which purchased a 100,000-square-foot office building in Monterrey. But others are selling, including KoSa, a polyester production company, which is disposing of four properties spread throughout Mexico, and Citigroup, which is selling El Campanerio, a residential property in Queretaro. Citigroup recently made the largest foreign investment ever in Mexico, though, when it acquired Grupo Financiero Banamex-Accival, the country's second-largest bank for $12.5 billion, acquiring its real estate assets.

Some corporations are entering Mexico for the first time. The apparel division of Nike is developing its first Mexico office in the Lomas de Chapultepec business district of Mexico City, and TeleFlex Inc. is moving some of its aerospace processes into the region. While Toyota Motor Corp. is still considering a major plant in Mexico, Tellabs Inc. took 30,000 square feet of office space in Mexico City, and Deloitte & Touche L.L.P. is soon to move into its new 120,000-square-foot space in Mexico City.

Even so, the average vacancy rate of Class A space in Mexico City was nearly 14 percent at the end of the third quarter, according to Colliers International numbers, and corporate real estate executives are singing a tune familiar now in the United States.

"Companies have delayed relocating decisions until the economy picks up in the U.S.," said Azcue. "When the U.S. picks up, so will Mexico." Corporations wanting to expand operations into Mexico and invest in real estate may also be waiting for Standard & Poor's, which is owned by McGraw-Hill Cos., to promote Mexico to an investment-grade status for foreign debt, a status that Moody's Investors Service has already granted. Still, Whitehall Street Real Estate Funds, Cargill Inc. and American International Group Inc. are rumored to be shopping for investments in the region.

On the other hand, a rocky economic situation in the United States can bode well for the Mexican real estate market. "When things get tough in the U.S., companies need to improve their margins and need alternative strategies to producing their goods, so Mexico becomes more attractive for industrial," said Bob Peinado, managing director for Latin America at Binswanger International. "Even so, projects are put on hold for right now. When the U.S. economy gets a cold, Mexico gets pneumonia."

Henry McDonald, senior managing director at Insignia/ESG in Mexico City, advises companies to do otherwise. "The demand for new office spaces in countries like Mexico and the rest of Latin America is driven by good companies that can put their workforce in these newer, modern spaces," he explained. "We're telling all of our clients that they should start looking into the future and start doing long-term facility strategies to take advantage of the overbuilt markets in the next few years."

With approximately 5 million square feet of new speculative office space in various stages of construction in Mexico City and the new Rochavera project in Sao Paulo, the Latin American hot spots for U.S. corporate expansion are opening up.

And new markets might soon start attracting U.S. corporations as well. When Valentin Paniagua took leadership of the politically troubled Peru in 2001, institutional and private investors alike took a new interest in the economy. Vacancy rates in Lima at the end of third quarter 2001 were at 21 percent, according to Colliers International, but there are no speculative projects in the marketplace, and Colliers predicted that in the first half of 2002 that vacancy would eventually stabilize around 10 percent.

"There is a surprising amount of activity in Lima," said McLernon. "There's expansion in some sectors of Peru because there is so much pent-up demand. With all of the political problems due to Fujimori, everyone was sitting and waiting, waiting, waiting. Now that the new president is in place and business is back to normal, deals are finally going through."