The Morning Report
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Greg Shannon has had a tough time in La Jolla.
The San Diego developer has spent five years fighting to build two houses there. His project fits within development restrictions on the property, but he still can’t get a permit due to protests from neighbors and hassles from city bureaucracy.
Shannon’s experience isn’t rare in San Diego, and is part of the why the region hasn’t built enough new housing to keep pace with a growing population.
That’s why Shannon and other small San Diego developers have turned their sights to the other side of the border.
“My favorite disruptive theory is, Tijuana as an affordable housing market for San Diego,” Shannon said.
Tijuana is drawing San Diego developers’ attention for two reasons. One is the emerging market from a growing city undergoing a cultural revival. The second is how difficult and expensive it is to build in San Diego.
“Before there was zero interest from Americans in building here,” said Cesar Leal, director of business development at SEICA, a consulting company in Mexico. “Right now, in the last four months, there’s been a lot more interest showing up.”
Daniel Reeves, the senior vice president of economic development and public policy at Downtown San Diego Partnership, said he doesn’t think this will be a one-off trend for developers.
“You have these forward-looking developers, like Greg Shannon, seeing this,” Reeves said. “I think it is scary for a lot of developers to consider Tijuana, because it’s a different process. But once it pays off for one, we’ll see a flood of people.”
The trend carries its own risks.
While San Diego developers seek relief and opportunity in Tijuana, there is a risk they could shut Mexicans out of the housing market if this becomes a trend.
If more Americans begin building in Tijuana, it may impact housing affordability for moderate- and low-income Mexicans, said Lawrence Herzog, a professor at San Diego State University who focuses on city and regional planning around the U.S.-Mexico border.
Mexicans in the real estate and planning industry, like Leal, are excited about the opportunity to partner with Americans who need their help maneuvering the Mexican system. But affordable has different meaning in San Diego and Tijuana, Herzog said.
“We always have to be very aware of the huge socioeconomic differences between San Diego and Tijuana,” said Herzog.
A $400 to $1,200 rent might be affordable to moderate-income San Diegans; only the low end of that would help a similarly situated moderate-income Baja Californian.
“I would be slightly worried if developers were coming in and building higher-cost housing,” he said.
There are always concerns of gentrification when developers take interest in a new city or neighborhood, said Reeves.
“Anytime that occurs, there should be concerns,” Reeves said. “However, the flip side is those are all construction and service jobs.”
And those jobs can help raise the earnings of lower-income individuals, he said.
Outsourcing San Diego’s Housing Needs
Shannon sees both market-driven and cultural opportunities in Tijuana.
The U.S. Customs and Border Protection’s SENTRI program, which gives pre-screened travelers expedited clearance coming into the country, has made for a less painful border-crossing option. Security concerns have fallen considerably since Sept. 11 and the height of Mexican drug violence. And Baja California is going through its own revitalization – tech hubs, restaurants and local artwork are filling the once abandoned or sleazy storefronts in downtown Tijuana, and Valle de Guadalupe has become a premier wine and food travel destination.
But while Baja is becoming an increasingly appealing place to live, its real estate market needs to catch up.
There’s a dearth of rental units in Tijuana for between $400 and $1,200 per month— there’s high- and low-end, but little in the middle.
But that’s a range where there’s a need, for people on both sides of the border.
Projections from Softec, a Mexico City-based economic and real estate research firm, predict that between 2013 and 2025, Tijuana will need roughly 300,000 homes to meet demand from population increases.
Rental apartments are something new in Mexico, said Leal. Before, apartments were a family business and companies didn’t invest in them in a formal way.
Many Mexicans used to live outside of the city and commute to work, he said.
“But that’s changed a lot now,” Leal said. “People are realizing that the commute wasn’t worth it and people are moving into the city. And the people who moved to San Diego at the worst of the drug violence are moving back because downtown Tijuana is revitalizing.”
That is, some of the increased development could simply benefit those already living in Baja California, or those who relocated in recent years and are looking to come home.
For California developers, though, the most important considerations are what Tijuana doesn’t have. Like CEQA, the state’s landmark environmental law that routinely waylays developers. Or empowered neighbors against new development, who can delay a project indefinitely with specious complaints. And the permitting process and cost of building is both easier and cheaper.
Leal said now is a good time for Americans to invest, since the peso is weaker against the dollar, making it less expensive for Americans to purchase things.
“What is really misunderstood is that Tijuana is very important to San Diego. It’s actually where our affordable housing is,” said Shannon.
That is, working-class residents have already realized they can escape San Diego’s high housing costs by crossing the border.
More than 28 million people came through the San Ysidro border crossing in 2014, according to data from the U.S. Customs and Border Patrol. And the San Ysidro trolley station is also the second-most active on San Diego’s network, with about 17,955 riders daily. Given that San Ysidro is home to only 20,000 people between 20 and 60 years old, it’s a safe assumption that many of those riders come from Tijuana.
It’s an international version of what real estate agents call “drive until you qualify.” Facing unaffordability, residents fan out ever farther, trading cheaper housing for longer commutes.
In a lot of housing markets, increases in housing prices force wage increases, but that hasn’t happened in San Diego, said Erik Bruvold, president of the National University System Institute for Policy Research.
That’s partly because people can instead live in Tijuana and Temecula and work in San Diego, he said.
“Sometimes the figures for housing and housing prices in San Diego County can be a bit misleading,” Bruvold said. “They don’t help us understand how housing prices in Temecula and Baja are and how they interact with the San Diego economy.”
Much of Murrieta and Temecula were built because housing costs in San Diego pushed lower-wage residents to the area, said Greg Strangman, a developer working on a hotel project in Tijuana.
“That’s how that Inland Empire came about,” Strangman said. “And in the same way, you could have the same situation in Tijuana. It’s a shorter commute coming from Tijuana to San Diego than Temecula to San Diego.”
Reeves said many young Mexicans who graduate as software engineers or computer scientists end up moving to Tijuana, and that workforce is something that San Diego’s tech companies can tap into as that sector of the city’s economy grows.
“The relationship to Tijuana is the single most important economic advantage that San Diego has,” Reeves said. “This all boils down to where our young, educated professional talent and where they are going to live. Does it make more sense for them to jump through all the legal hoops to live in San Diego legally or does it make more sense for them to cross the border every day? That’s not even mentioning the difference in the cost of land and the cost of living.”
A New Set of Problems
Interest from smaller San Diego developers in Tijuana could be a signal of what’s to come. Smaller developers are often trend-setters in the industry – less bureaucratic and more nimble, they can operate in new and riskier environments, paving the way for larger corporations to follow their lead.
But their experience so far shows developing in Mexico has its own set of problems – they trade CEQA and NIMBY opposition for complicated restrictions on foreign land ownership and a less secure real estate system.
Since participating in an Urban Land Institute study intended to help with revitalization of downtown Tijuana, Shannon has been trying to build a for-rent apartment south of the border.
It’s been two years, and the project has revealed a handful of obstacles developers face.
The first comes from Mexico’s Constitution, which prohibits foreigners from owning property within 100 kilometers of the border and 50 kilometers from any sea – pretty much all of Baja California.
This one is pretty easy to circumvent, though. Foreigners can either create a Mexican corporation to purchase the land or set up a trust through a Mexican bank. There is also a bill in front of the Mexican Congress that, if passed, would allow foreigners to hold property in the restricted area.
There are also logistical issues with purchasing real estate in the country. It’s much less straightforward to find escrow services, use standardized contracts and secure title insurance.
Real estate agents aren’t as tightly regulated as in the U.S. A publication from the Arizona Department of Real Estate, “Buying Real Estate in Mexico,” advises U.S. buyers to verify anything a Mexican real estate agent says, for example, and warns that down payments or money in escrow is at higher risk in Mexican transactions.
“It’s just a matter of not leaving your brains at the border,” said Ben Rosen, a lawyer who works on cross-border transactions. “Most of the time, when foreigners lose property, it’s because they didn’t do their due diligence.”
But that due diligence isn’t simple. For instance, land may be an ejido, a distinction harkening to the Mexican Revolution. It is communal property reserved for poor local farmers that can’t be sold without their permission. But you might not know you bought an ejido until after the transaction, when it’s tied up in court.
Mexico also has stronger squatters’ rights than the U.S. Mexico assumes a person has the right to occupy property until proven otherwise. The burden of proof is reversed in the U.S.
And Rosen said foreigners face a disadvantage if they end up in court because they may not know how to navigate a system that is more vulnerable to corruption than the U.S. judicial system.
Financing can be tough too. In the U.S., developers take out low-interest, long-term construction loans to fund projects. That’s not an option in Mexico.
Two years in, Shannon hasn’t secured land yet.
Strangman, though, is already building in Tijuana. For his project remaking the Lafayette Hotel on downtown’s Avenida Revolucion, he circumvented problems the old fashioned way: with cold hard cash.
He initially put up about $200,000 of his own cash, he said, and he entered into a long-term lease with a Mexican property owner rather than buying raw land.
He’s turning the Lafayette Hotel into a brand of boutique hotels he wants to build across the border region, called One Bunk. He already has one in Barrio Logan, the refurbished hotel in Tijuana will have seven rooms and he is trying to buy raw land to build another five to 10 rooms in the Valle de Guadalupe.
“If it doesn’t work, it could be that I’m a little too early to the market and Tijuana isn’t ready for it,” he said. “But the good thing about going in early is that you get a better deal. The land values and the lease that I have now, someone who comes down years later won’t be able to get.”
Making it Work
Strangman said his experience thus far has been that the Tijuana government is pro-business and pro-development, trying to bring life back into the city after Sept. 11 and narco-violence halted tourism, Tijuana’s lifeblood since it was born out of U.S. Prohibition.
He said the government permitting process is easier, the fees are lower and costs for construction and professional services like engineers are cheaper. The cost of a structural engineer for initial inspections was about $2,000, he said. In San Diego, it would be closer to $15,000.
Raw land is cheaper, too. A North Park lot cost him over $200 per square foot. In Colonia Cacho, a similar Tijuana neighborhood, land is about $30 per square foot.
The planning process in San Diego is stringent and rigorous; in Tijuana, it’s negotiable.
“There are more people who just do what they want to do and then go to the city after the fact and negotiate,” Strangman said. “But in San Diego, they would shut you down. The fines and penalties would be so stiff and firm. Down there, you could probably give someone a little extra money, and get out of it.”
Strangman said he’s using the hotel project as a learning experience.
“The thing that is intriguing to me is it’s a new frontier,” he said. “It’s a new market. It’s a growing market. Obviously there’s more risk, but therefore, there should be more reward.”