Nearshore Americas

Site Selection Primer: Why is Real Estate in the Nearshore So Complicated?

The site selection checklist for nearshore investors can seem endless; human capital, costs, infrastructure, incentives – each one crucial to getting the right deal. Within that mix, though, one critical factor with the ability to slam the brakes on the whole process is often overlooked or underestimated: real estate.

To walk us through the Latin America real estate minefield, Nearshore Americas caught up with Jeff Pappas, Executive VP at Arledge Partners, a company offering site selection services and real estate negotiations that specializes in call centers and BPO.

The first shock to the system for new investors in nearshore real estate is just how long the process can take, according to Pappas, who says six to nine months is the minimum time to get a call center operational.

“We can find that one, two story tech space in the United States all day long,” he said. “[But] in the majority of Latin America you don’t have that type of move-ready space where you can make a fast decision.”

The main reason for this, said Pappas, is the absence of the sort of business world fluctuations that create readymade and readily available spaces – companies moving on to scale up or scale down or closing down completely.

“The majority of [companies] haven’t closed their Latin American centers because they have been very successful and they’re in it for the long term, so you don’t see vacant call centre space in Latin America,” he said. The one exception to this is Cost Rica, he added, where rising costs are driving companies to leave in search of cheaper markets.

The lack of available sites is compounded by the scarcity of information on what real estate is available. “You can’t just go to a database and find all these vacant properties, sometimes you have to spend an extra day in the market and just drive around,” he said. “You have to know and be in the know of who owns the facility and who the investors are in that market.”

Biggest Challenge: Accessibility

Also time consuming is the need to search for properties with attributes that would not normally be an issue in the United States. The most important of these, in fact possibly the most important attribute of all for call centre real estate, according to Pappas, is accessibility.

While in the United States, sites need little more than parking spaces, in Latin America only a minority of employees drives to work, leaving the rest dependent on public transport. “It may be a great building, it may look nice but if the top 20% of your workers need five bus transfers and an-hour-and-a-half to get there then you’re never going to keep those guys,” he said. “I can get a worse building but save two or three bus transfers and I’ll take that top employee off you.”

The next nasty surprise for new investors is the cost, according to Pappas. “Real estate is not cheap, that is the one thing that people are shocked about when we do these projects in Latin America,” he said. “These properties are class B properties for class A rates that you’d see in the United States.”

According to Pappas, real estate that would go for $12-15 a square foot in the United States is often priced at $19-21 in Latin America, a price differential that needs to be factored into calculations on labor arbitrage savings.

Upfront Capital Expenditure

Companies also need to be willing to invest more in upfront capital expenditure, Pappas said. “In Latin America, few owners will actually build the space out turn-key for you, most of them want to do an “as is” deal – keep their rent low, keep their tax structure low,” he said. “You, the tenant, will have to put in its own build-out – its own generator, bathrooms, breakrooms, offices, the training room.”

However, it is not all bad news for BPO operators on the lookout for nearshore property. According to Pappas, the Latin approach to business leads to a level of flexibility in contract negotiations that would be unheard of in the United States, including over such commonly non-negotiable factors such as exiting the lease. “One of the key things people say is that everything is negotiable in Latin America and that includes the lease,” he said.

While the real estate markets in different Latin America countries shares many characteristics, there are of course differences as well. According to Pappas, the state of the BPO real estate market is often linked to the state of the outsourcing market as a whole. “Typically, if you see a more mature call center market you probably see a more mature real estate market.”

Pappas highlighted San Jose in Costa Rica as the region’s top location in his experience, owing to its multiple business parks, which are easy to access and have good telecommunications setups and infrastructure. He also commended San Salvador in El Salvador as another top destination for its high-end high rises and San Pedro Sula, where the development of the BPO market has been aided by the construction of two impressive towers at the Altia Business Park by developers Grupo Karim’s, which is currently in the process of constructing a third.

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For the rest of the region to catch up, Pappas said, the trade promotion bodies that work so hard to sell their markets to investors in other areas need to start taking more responsibility for real estate.

“After you’re incorporated then it comes down to how fast can I get the buildings built, or what buildings exist and [trade promotion bodies] have to know that and a lot of times they don’t,” he said.

According to Pappas, the best way for them to do this is to begin compiling data bases that can give potential investors a snapshot of their real estate options – in both lands available for development and properties, whether they are move ready or not.

“The company is going to say how fast can I get in there, how fast can I get my centre open and that all comes down to real estate,” he said.

James Bargent

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