Real Estate & Construction

A symbiotic relationship

E-commerce may be the secret ingredient needed for Mexico to grow its industrial real estate market.

The industrial real estate market has slowly but surely been on the rise in Mexico, as more businesses in the automotive, manufacturing, and logistics sector have come to roost in the country. Historically, increases in this market were boosted by favorable trade winds brought on by free trade agreements, such as NAFTA, and more recently, buoyed by new financial tools introduced in the country such as real estate investment trusts (FIBRAs) and capital development certificates (CKD).

However, long-term growth of the country’s middle-class population has prompted the increased consumption of products, especially those sold through e-commerce channels. While the country still has much potential to realize in the e-commerce market, more and more companies are investing into industrial logistics space assets to get a head start on the competition.
Since institutional-grade asset class was introduced in the early 2000s, logistics real estate strategies have changed from being production-oriented markets to hybrid investments. This means industrial space use has slowly changed from one of production to one of distribution and logistics, vital to e-commerce. In general, most consumption-oriented regional distribution has focused on servicing Mexico City, though Monterrey and Guadalajara have also experienced a rise in consumption. The numbers of current industrial park space in the country only reflect this trend.
According to the Mexican Association of Industrial Parks, in 2Q2019, the country recorded a total inventory of 79 million sqm of industrial space, most of which was concentrated in Mexico City, with 12.3 million sqm. Monterrey was a close second, recording a total of 10.98 million sqm. Meanwhile, the country’s average availability rate for that quarter registered 5.88%, meaning the demand for industrial space is certainly there, with Mexico City recording 3.91%, while Ciudad Juarez recorded 8.68% and Monterrey 8.17%. The country’s accumulated gross absorption rate really drives home the point: at 464,943sqm, it was up 29% YoY for 2Q2019.
As explained, part of this growth is due to the change in demographics in Mexico’s population, specifically regarding rising affluence and young urban population. Another cause of recent increase is the lack of supply of modern, up-to-date facilities with access to major roads and building features oriented toward modern distribution and logistics processes. But it is clear that the growth of these trends have come in tandem with the steady growth of e-commerce in the country. And while exact numbers regarding e-commerce percent in these industrial parks is difficult to pin down, e-commerce certainly drives demand for these spaces.
Unsurprisingly, e-commerce involves the more intense use logistical spaces. According to Prologis, in the US, every USD1 billion of retail sales translates into 1-1.5 million sqft of new logistics real estate demand on average. In Mexico, this ratio is even higher, as e-commerce companies ready themselves for the growing e-commerce wave. Indeed, with e-commerce still not at its full potential in the country, companies are currently investing with future sales in mind, thus driving demand in the industrial real estate market. Right now, the country’s internet penetration remains low, and the unbanked population is still quite large.
Currently, according to Americas Market Intelligence, online shopping represents around 2% of the country’s USD203-billion annual retail sales. Most e-commerce demand is focused in Mexico City, but demand is expected to broaden to regional consumer markets, like Monterrey and Guadalajara, as national players build out hub-and-spoke supply chains. The current COVID-19 pandemic will also play a role in making online shopping more appealing. With mid-tier omnichannel and pure-play e-commerce operations scaling up quickly, they will soon be able to move out of their shared e-commerce and brick-and-mortar supply chains to dedicated facilities.
Current estimates place Mexico’s online shoppers at over 68 million in 2020. With its young population enjoying greater spending power, e-commerce companies will be sure to take off within the next few years, and with them, the need for industrial logistical spaces.