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Five Things That Might Scare You About Nearshore Real Estate

Five Things That Might Scare You About Nearshore Real Estate

By Patrick Haller

Nearshore countries say they want the IT and BPO jobs, but some are apparently not willing or able to provide the office space those jobs require. Dynamics vary from location to location, but finding the right facilities for your business is not typically going to be simple. Here are five risks you should be aware of when sourcing real estate in the region.

Can You Scale-Up There?

Scalability is proving to be difficult in many countries that have been saturated with call centers in need of bilingual staff. “Real estate is a necessary byproduct of the labor market,” says King R. White, President of Site Selection Group, LLC. Identifying a location with a viable labor pool is the first and most important step when assessing a market. “Honduras was one of our favorites; Startek just opened there. It is one of the last ones left with labor market scalability. You need an area with a minimum of million people where you will hit about 5% with bilingual skills. There are pretty slim options out there. Look at middle players like Colombia, then Panama, Guatamala and Costa Rica.”

Jeff Pappas, Partner/EVP of Arledge Partners, a worldwide real estate firm specializing in properties for call centers, agrees, “Companies need to find a market that is not saturated. El Salvador is saturated for English language labor. Look at Belize, Guyana, and to an extent Jamaica. Colombia is still – more so Bogota, maybe Barranquilla – a strong market. The political stability in recent years has been much better than in other countries. Peru and Chile are two very good markets. I see Argentina as a very good market. In Buenos Aires, Rosario, Santa Fe. Honduras is still a good market. Guadalajara is very good, and parts of Mexico City are good markets.”

Demand Outpaces Supply

Tom Geurts, with Cadence Capital Group,  a merchant bank serving middle market real estate owners and operators, reported in a webinar on Latin American real estate, “During the last three years Latin American countries have experienced positive GDP growth, which makes it attractive for real estate investment.” That said, Pappas of Alredge Partners warns, “The demand way outweighs the supply.” Companies might find the right market, but discover that the available properties are not in the right area of the market.  In Colombia developers have noticed the gap and are building the shells that can be built-out to suit the tenant’s needs.

The report Emerging Trends in Real Estate 2011, prepared jointly by the Urban Land Institute and PricewaterhouseCoopers, found that when it comes to the Brazilian office market, ‘investors find an extremely limited menu in only two cities—Rio de Janeiro and Sao Paulo.’ “Everyone wants to be in Rio.” The relatively small business district has virtually “zero percent vacancy,” and rents skyrocketed “30 percent in the last year.” Sao Paulo, where the office sector remains tight, has seen escalating rents and values in a bubble driven by user demand, not speculators. In Central America, Pappas doesn’t see a lot of difference between the countries, however, Guatamala and El Salvador have the most competitive pricing.

Pappas said, “Bogota is pretty limited in larger sized real estate options. We have been looking at plus or minus 30,000 sq ft office space near mass transit and near universities. The surplus hasn’t been there, but the demand is there. We had five options, but only two or three were really viable.” (Bogota has the most expensive real estate in South America.)

Office developers in Panama are forecasting a 69% increase in office inventory over the next three years. Of course traditional “office space” doesn’t automatically equate with call center facilities, but it is a good barometer of market activity. “Based on my past experience rents would probably drop about 15% to 25% depending upon an office building’s leasing demand. This is what I saw happen in Mexico City’s Santa Fe submarket,” advised David Berger, Managing Director, Latin America & Caribbean NAI Global, in his report The Future of the Panama Office Market.

Approximately 40 contact centers are operating in Costa Rica’s central valley cities of Hereria, Cartago and San Jose. “But,” says Andrea Centeno, Director of the country’s investment body CINDE, “we are no longer proactively attracting contact centers,” as the focus has shifted to shared-services operations. With that in mind, it is unlikely there is an initiative to create suitable facilities in this nation.

“Guatemala City has some of the better real estate options, better than El Salvador and Honduras. Honduras has been behind in Central America in promoting BPO/IT facilities. Managua has been proactive with developers building space out. Real estate is not a decision maker – it can be an eliminator when looking at all the factors. In order for a country to be proactive, the property needs to be in the right location, near mass transit and universities. It is better to have fewer, better quality options so you don’t waste a lot of time,” Pappas said.

Confirming Ownership

As obvious as this might sound, investigate to make sure the person you’re dealing with has the correct authority to make a deal. “Ownership is probably the number one issue,”  Pappas says. “There can be multiple owners on a property, and it is not always easy to find out who the owner is.” To assist with doing the title search, Arledge works with a government economic director or someone in the mayor’s office. “If a country is actively trying to attract BPO/call center investment, they are usually proactive with preparing the needed data.”

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Once ownership is confirmed, it is advisable that records should be checked to confirm there are no liens, outstanding taxes or bankruptcy filings. As in any market, it is advisable to use the services of a local qualified and experienced real estate attorney.

No “Free Rent”

“For newcomers to Latin America and the Caribbean, tenants have to provide and pay for their own tenant improvement (TI) build-out — 100% of it — unlike in the US where landlords provide a TI allowance that allows for a vanilla build-out,” Berger says.

“In Latin America and the Caribbean, occupancy contractually starts once the lease contract is duly signed between and delivered to the participating parties. On an additional note, during the TI construction period, tenants in Latin America and the Caribbean also pay for all utilities and the CAM for the leased premises starting upon the effective contract execution date; unlike the US where these expenses are largely absorbed by the landlord until the tenant takes possession of the improved premises.”

Building owners and developers can learn from what Mexican lessors started to do when that market became overheated. As competition tightened and the office vacancy rate climbed above 14%, some lessors began to provide some of the TI’s that may be considered core items and that could be used by any future occupants of the same premises, such as the main fire sprinkler ring, main HVAC ducting, some key VAV boxes, and primary electrical to the floor. As the vacancy rate climbed above 19%, a few landlords began to offer to amortize the cost of the tenant improvement build-out.

Tenants in the region are fortunate to receive three-month grace period just for the tenant improvement build-out, and in secondary and tertiary sub-markets they may only get two. In the USA the contract occupancy term does not begin until the TI construction period is concluded or the pre-negotiated construction period expires (usually three months), whichever occurs first.

An interesting aspect of building-out a facility is the density ratio. White compares the average 100- to 125-sq-ft per workstation (including common space) standard in the US to the 75 sq ft per person in Latin America. He has also seen it as low as 50 sq ft per person. “There are not as many rules and regulations around density restrictions like there is in the States,” he says.

Contagion in the Marketplace

The financial crises and debt talks in the US have shaken international confidence, and this has had a direct effect on Nearshore destinations. Other contagions, such as perceived security issues in countries like Colombia and Mexico, rising inflation in Brazil and political uncertainty in Argentina have call center operators looking at these locations with skeptical interest. “Investors are moving away from Mexico, not only because of their dependence on the US economy, but also because of the acceleration of crime,” said John Druckman of Fontis Capital Group LLC during the Cadence Capital webinar. “But there is always opportunity. Brazil is plagued by inflation, which is still a concern, but overall with the solid continuance of the governance structure. If you look at Argentina there is fiscal instability and a problem with the government.”

 

About Kirk Laughlin

Kirk Laughlin is an award-winning editor and subject expert in information technology and offshore BPO/ contact center strategies.

One comment

  1. Although the author is correct in saying that landords in LATAM do not include leasehold improvements, the article does not discuss the role of government incentives. For example, in Mexico, if you create a delivery center that is not commodity (ie. not a plain vanilla call center) and you create new jobs, there are programs that can fund up to 50% of your startup cost including leasehold improvements and equipment (computers, telco etc). This program (PROSOFT) is not a tax incentive, it is incentive money paid upfront. Of course, the government will audit you afterwards and make sure you created the number and quality of jobs that you promised, but that is to be expected when someone hands you a fat check upfront.

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