Canada Firm Places Bet on Mexico Border

CIUDAD JU�REZ, Mexico�In this violence-plagued border town where thousands of workers assemble U.S.-bound goods, Brookfield Asset Management Inc. is betting that it can put together the pieces of an investment that was undercut by the U.S. recession and drug wars.

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Brookfield placed a large real-estate bet on the Mexico-U.S. border. Above, the bullet-riddled window of the Diario de Ju�rez newspaper office.

In December, Brookfield completed its purchase of an 81% stake in Verde Realty, a large property owner on the Mexico border, in a deal that valued Verde at $886 million. Brookfield declined to disclose how much it paid for the stake. Verde was founded a decade ago by real-estate mogul William Sanders largely on the belief that manufacturing along the border�fueled by the 1994 North American Free Trade Agreement�would continue to gather steam.

But, with property values depressed on the Mexican side of the border, Verde turned into a financial disaster for the long list of high-powered investors that Mr. Sanders led into the company, including Vornado Realty Trust and Fortress Investment Group . Between 2003 and 2007, Mr. Sanders financed the company by selling shares for $25 to $33 each. The price paid by Brookfield and its partner, Ross Perot Jr.'s Hillwood Development Co., to buy the company: $13.85 a share.

Real-estate experts say that the value of industrial property has declined by as much as 10% in some Mexican border cities. "There was a discount for Mexican assets," said David Arthur, managing partner of Toronto-based Brookfield, which has $181 billion in assets under management, including real estate, infrastructure and energy.

Brookfield's bet also is based on its belief that a recovery is under way. Mr. Arthur points to a decline in drug violence and a strengthening of U.S.-Mexico trade. Hubs such as Ju�rez have been particularly important for assembling bulky, complicated goods such as flat-screen televisions and all-terrain vehicles. Verde owns 18 million square feet of industrial property, one-third of it on the Mexican side of the border.

But these days, investing in Mexico is a contrarian bet. There are "a limited number of people who have an interest in Mexico" in the current real-estate climate, Verde Chief Executive Ron Blankenship explained to investors on a conference call last year about the Brookfield deal. "I realize there is frustration about this point, but that is the position we're in."

Mexican border factories, known as maquiladoras, began sprouting in the 1960s, but their growth greatly accelerated after Nafta made most trade between the U.S. and Mexico duty-free. Currently, nearly 1.5 million workers are employed in one or more of approximately 2,800 maquiladoras in Mexico, according to John Christman, a retired analyst in Mexico City who tracks the industry. In Ju�rez, industrial space has grown to 60 million square feet from 29 million in 1997, according to brokerage CBRE Group Inc.

Yet, amid that growth there have been fits and starts. Maquiladoras stagnated and, in some cases, contracted in the early 2000s because of the U.S. recession then and China's entry into the World Trade Organization. Low-skill manufacturing, namely apparel, has migrated to countries such as China, Honduras and the Dominican Republic.

More recently, the strength of maquiladoras has been sapped by the global economic downturn and the drug war. The industrial vacancy rate in Mexico's border towns stands at 8.6%, nearly twice Mexico's national average, according to brokerage Jones Lang LaSalle .

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Workers at a Viasystems manufacturing center owned by Verde Realty in Ciudad Ju�rez examine and test parts for the assembly process.

On a recent visit to Ju�rez, there was ample evidence of the damage done by the drug war and poverty to the maquiladora dream. Outside the factories, some federal police patrolled the streets in vehicles bristling with high-caliber guns. Residents live in rows of tightly packed, dilapidated homes, and wind-blown garbage clutters the streets and open fields. The factories themselves have high perimeter fences, gatehouses and numerous security cameras. Workers at Verde facilities that were toured rarely venture outside during their shifts. Some plants provide escort vehicles for executives when they travel outside the security perimeters.

Ju�rez has a 15% vacancy rate partly because of the recession and its reputation as the bloodiest venue for drug-cartel violence. According to the government in Ju�rez's home state of Chihuahua, homicides in Ju�rez declined to 730 last year from 3,084 in 2010.

Maquiladoras in Ju�rez screen prospective employees for criminal records and keep little cash on their premises. Many plants got rid of their ATM machines in 2008 after a rash of robberies in which thieves stole machines and forced employees at gunpoint to give their security codes, according to accounts in the Mexican press.

In an interview, Mr. Blankenship said the weak economy was more to blame for Ju�rez's high vacancy than violence. "I'm not minimizing the violence, but I can think of only one tenant that we lost due to that." He declined to elaborate.

Other large owners of Mexican border warehouses include U.S. real-estate investment trust Prologis Inc., Prudential Real Estate Investors and a joint venture of Kimco Realty Corp. and a Mexican firm. In December, a Mexican REIT created by Australian banking giant Macquarie Group debuted on the Mexican Stock Exchange and quickly amassed a portfolio of 224 industrial properties, most of them in Mexican border cities, in two deals totaling $1.5 billion.

The roots of the Brookfield deal stretch back to 2011, when Verde was forced to cancel an initial public offering, citing an inhospitable stock market. Mr. Sanders, who stepped down as nonexecutive chairman that year, didn't return phone messages seeking comment.

Still needing capital to grow, Verde went on a yearlong search for partners. Brookfield initially offered $12.85 a share to buy Verde. After big Verde shareholders resisted, the price was raised by $1.

Now Brookfield is counting on tenants such as manufacturer Viasystems Group Inc., which makes, among other things, energy-converter equipment to be installed in wind turbines. Homero Galindo, general manager of the 200,000-square-foot plant, noted that the clean, professional atmosphere in Ju�rez's industrial buildings differs from the city's gritty streets. "The violence pits the cartels one against the other," he said. "But the people who go to work every morning are very good."

—Ana Campoy contributed to this article.

Write to Kris Hudson at kris.hudson@wsj.com