Industrial Real Estate in Costa Rica

The Central American Group:  Hello and welcome to another installation of the Central American Group’s informative podcasts.  These are recordings in which we speak to individuals that are internal and external to the organization on topics that are to know when doing business in Central America.  Today, we are lucky to have Daniel Alvarez with us to tell us about industrial real estate in Costa Rica.  Daniel is with Cushman Wakefield.  I would like to day hello, Daniel.  Please introduce yourself and provide a little information about your background.  

Daniel Alvarez: Sure, thank you for having us.  I am the managing principal for Cushman-Wakefield operations throughout the Central American region, based out of San Jose, Costa Rica.  I have been in this position for the past five years.  Prior to that, I managed corporate real estate projects on a multi-market basis throughout the rest of Latin America, based, always, out of San Jose, Costa Rica. I did that for about ten years.  It’s been five years now working for Cushman-Wakefield, one of the global leaders in real estate services.  There’s lots of growth and dynamism in the region and we’re looking forward to growing the market in the region in the upcoming years.

The Central American Group:  That’s great.  Today we are going to talk about industrial real estate in Costa Rica.  We have several questions.  First of all, I would like to know if you could just give us an overview of the current size of the market for industrial real estate in Costa Rica?

Daniel Alvarez:  Sure.  In terms of size, the industrial real estate market in Costa Rica is roughly 6 million square meters of rental space.  This is pretty significant for the size of the country, being a nation of only roughly 52,000 square kilometers with a population of just five million.   The market for industrial real estate in Costa Rica is pretty big considering.  This is because we have specific drivers for these key sectors that include medical devices, advanced manufacturing, and we are a relevant logistics hub for the rest of the region as well.  These three lines are driving significant demand for the industrial sector.

The Central American Group:  You have mentioned that you have been in this several years now, could you give us some information, from your perspective, on how the industrial real estate market in Costa Rica has evolved over the last 5-10 years?

Daniel Alvarez:  Historically, Costa Rica has been an economy driven by agriculture and tourism.  Beginning in the 1990s and the early 2000s, from an industrial perspective, the main driver of that sector of the economy was clothing manufacturing.  This included companies such as Hanes Brands.  For example, they had several plants established in Costa Rica.  They were producing clothing for all of the Americas.  Costa Rica was one of their main hubs.  They took advantage of the competitiveness of our overall cost structure and the capabilities of the workforce at that point in time.

However, throughout the years, we have seen an accelerated pace of disruption and evolution in the industrial real estate market in Costa Rica.  Today, we are not overall cost competitive for unsophisticated manufacturing operations.  Our economy is now what we call an “added value” economy in the industrial sector.  We have developed a significant presence in the three streams that I mentioned earlier: medical devices, advanced manufacturing, and then a logistics hub for the Latin America region, as well.  Clearly, the increase in the industrial real estate market in Costa Rica is a result of all of the efforts that have been made and driven by our country’s leaders to prepare the workforce to perform highly sophisticated tasks.   Today Costa Rica has one of the main clusters for advanced manufacturing and medical devices. 

The Central American Group:  Can you delve a little bit deeper into the reasons that this evolution in the industrial real estate market in Costa Rica has developed this way?

Daniel Alvarez:  Yes.  So, I think that international companies are looking for a number of things when they are choosing a site at which to establish manufacturing operations outside of their home country.  The first thing that they seek is a competitive economic context.  In Costa Rica, we have been able to develop a very competitive economy in which the ease of doing business has been improving with each passing year.  We have a very, very stable democracy in which we have a very stable currency.  From a social and political perspective, we have not had a major disruption for a significant number of years now.  All of this continued stability and economic growth generates a feeling of certainty for international players investing in the country.   I thank that that is one of the main drivers.  On top of that we also offer what we call the Free Trade Zone Regime that many other Latin American countries also offer with different regulations, as well.  Free Zones generate a significant tax advantage for foreign direct investment.  Manufacturing operations in Costa Rica that are exporting to the rest of the world will see significant financial upsides when they have such tax advantages that vary depending on the type of operation, as well as depending on a number of other variables.  From a high-level perspective, I’d say that we have one of the most aggressive and attractive free zone regimes in Latin America for this type of operation.

The Central American Group:  With respect to individual companies that are occupying space in the industrial real estate market in Costa Rica, can you tell us what type of company would be a key player in your country?

Daniel Alvarez:  I think that there are various key players.  I do have to reference Intel Corporation as being a pioneer in our country and as being one of the most significant that opened the eyes of many other US corporations with respect to Costa Rica.  They were one of the first big players entering the market with very, very significant investments.  This took place more twenty years ago now.  They are still a major player in advanced manufacturing and research and development in the country. 

From a medical device perspective, we have a high number of the leading companies established in Costa Rica.  These include Boston Scientific, Applied Medical, Phillips, Hospira, and Bayer.  All of these companies have important operations in Costa Rica and use the country as one of their main hubs for the region. 

The Central American Group:  In terms of the territorial distribution of industrial real estate in Costa Rica,  we know that there are quite a number of free zones such as the ones that you have mentioned in the capital, but can you tell us a little bit about that area as well as the outskirts of San Jose or outside of urban areas in general?

Daniel Alvarez:  Yes.  Most of the development that has occurred today in the industrial real estate market in Costa Rica has taken part in what we refer to as the “Greater Metropolitan Area” (GMA).    This is composed of four main provinces.  The province where the most growth has occurred during the past ten years has been Alajuela.  Alajuela is where we have the Juan Santamaria Airport and, specifically, there is an industrial park within the Alajuela corridor called El Coyol.  El Coyol houses the main cluster in the country for industrial operations.  In recent years, many medical device companies have established operations in the eastern part of the Greater Metropolitan Area in a province that is called Cartago.  Cartago has seen very significant growth in industrial real estate in Costa Rica, as well.  These two locations can be considered to be important from an overall supply chain perspective.  Importantly, there is a qualified labor force available in close proximity.  This has enabled the industrial sector in these areas to grow. 

As we speak, we are starting to see a significant opportunity for development outside of the Greater Metropolitan Area.  CINDE, which is Costa Rica’s investment promotion agency, is now working to put together special incentives to promote investments outside of the GMA.  The idea is to have a more diversified risk structure and to reach other populations and workforces that do not have much opportunity for economic development at present.  We see tremendous opportunity related to this initiative.  Hopefully, in the next five to ten years we will see more growth outside of the Greater Metropolitan Area, as well. 

The Central American Group:  Yes, we are noticing increased interest in the Central American Group. As you may know, the CAG is working to develop its Greenpark Free Zone in Alajuela, Costa Rica.  We are seeing that being in proximity to Juan Santamaria Airport is something that prospective customers find to be quite useful.  As far as concerns growth within the capitol, we are seeing movement in terms of our development, as well.

If you could tell us, with some anticipation, how does the market for industrial real estate in Costa Rica look for 2020 from your perspective.

Daniel Alvarez:  I think that the outlook is a positive one.  The fundamentals of the industrial sector are pretty healthy.  We are seeing a local economy that is growing at a rate of two to three percent from the perspective of GDP.  Nonetheless, we do see the free trade zone regime sector growing between nine and eleven percent year over year.  As the free zone sector is the main demand for industrial product, it’s going to be a good year for both medical devices and advanced manufacturing.  As you clearly know, the logistics segment of the economy is just a result of the movement in the previously named two sectors. 

The one sector that is probably a bit more uncertain is logistics operations that are related to the local consumer market.  This is because the local economy is growing at a rate that is lower than the economy that results from foreign direct investment in Costa Rica.  Absorption rates in this area should be similar to the ones that we have seen during the past twelve months. 

The Central American Group:  Specifically, what kind of opportunities are in the industrial real estate market in Costa Rica and what type of companies could benefit from them?

Daniel Alvarez:  I think that the opportunities are for developers and users, as well as their business models in the country become more sophisticated.  Our main objective is to have Costa Rica occupy a position as an added-value economy for these types of operations.  We see a lot of promise in the area of research and development.  Many companies that can engage in R&D activities already have production lines established in the country.  We have seen the success of many clients in adding R&D operations to their existing businesses in Costa Rica.  This is an area where we see opportunities for all the players involved in industrial real estate in Costa Rica.

The Central American Group:  Do you see any trends that stand out in the market for industrial space in Costa Rica that will likely shape its future?

Daniel Alvarez:  I would summarize my comments by saying that it is a highly sophisticated market that is becoming more sophisticated year over year.  This is based on the types of operations that are being established in the country.  I think that Costa Rica is at the center of “what’s next.”  It is a country that clearly has demonstrated its capacity to adapt to trends rapidly.  That is one of the main added-values of the country’s economy as a whole.  This has enabled Costa Rica to become one of the most competitive economies in the Latin American region.

The Central American Group:  Daniel, we typically generate some questions from people that listen to these discussions.  Individuals tend to want more detail.  How would a listener that has questions regarding the Costa Rican industrial real estate market get into contact with you?

Daniel Alvarez:  They can contact me via email.  I am open to receive any questions.  My address is daniel.alvarez@ab-latam.com.  I will be glad to answer any specific questions that individuals may have.