Hitting Home Runs on Reforma

Q: What is the advantage of investing in central, businessoriented areas and what is your strategic approach to development?

A: The heart of any city is in its central business district. People do not remember cities by their malls or suburban areas but by their skylines and downtown areas. We entered Mexico after the 1985 earthquake. The city wanted to keep up with international trends and fix the damage created by the natural disaster and asked Paul Reichmann to be part of the revitalization in the early 1990s. Our most famous project is Torre Mayor.

In terms of our next projects, we are considering parcels of land on Reforma. Over the last couple of years, the area has widened by several blocks. Torre Diana is an example of this growth as it is not directly on the main avenue. Reichmann only develops strategically located Class A and Class A+ buildings to build up a portfolio of the most productive and efficient buildings in the country. To do so, we provide the best operating systems in terms of elevators, telecommunications and more. We are long-term developers that strategically invest in buildings that can meet the needs of our clients and make sure that our investors make a solid profit in our developments. We prefer to have fewer more strategic projects than to juggle the management of several projects as this jeopardizes the quality of the developments. This strategy helps us secure big leases such as ATT, Deloitte and AON that sign contracts for up to 15 years.

Q: What financial model do you use when developing your projects?

A: We generally use a 50/50 combination of debt and equity. In the US, it is normal to have between 80-95 percent debt balance in projects but given that Mexico is more volatile and at risk of exchange rates we avoid overleveraging. Instead we choose to fund projects with our own capital or with partners. We have solid lenders such as Metlife, Prudential or major banks such as Scotiabank and HSBC that provide construction loans. We built Torre Mayor with Paul Reichmann’s capital, at a cost of almost US$300 million. He was a risk-taker with a vision and took advantage of the opportunity to increase the value of the area. By the time we achieved a 50 percent occupancy rate in Torre Mayor, we took a securitized loan on Wall Street and acquired partners to recoup the capital. We are also the manager for all our projects and design the projects ourselves. It is a lot of work but we prefer to deal with the headaches up front. The hard work is paying off as 80 percent of the office-end commercial spaces within Torre Diana were preleased before construction was finished.

Q: What trends do you foresee in Mexico City’s office spaces?

A: The country has a growing middle class, which is going to increase the demand for services such as telecommunications and transportation. All these service companies will require strategically placed offices to be able to meet these demands. There are probably 10 million m2 of houses in Mexico that have been readjusted to work as offices. But a lot of these are occupied by small companies that sooner or later will need bigger spaces.

People tend to classify all new building as Class A but the definition takes into account a lot more, such as parking, management and operating costs. The market is being saturated by taller towers that end up taking longer to build and offer fewer square meters of available space. For example, one of our neighboring towers in Torre Mayor took nine years to build and has less than a third of its tower leased. On the other hand, Torre Diana took three and a half years to build and is 95 percent occupied. Torre Diana also has 64,000m2 of rentable space while the average project in the market has 35,000m2.