Real Estate & Construction

Lay of the Land

The reorganization of the real estate market

Over the past year, the real estate market in Mexico has undergone a dramatic shift in demand that has changed the sector’s landscape, largely in response to the COVID-19 pandemic. […]

Over the past year, the real estate market in Mexico has undergone a dramatic shift in demand that has changed the sector’s landscape, largely in response to the COVID-19 pandemic. As companies in Mexico and around the world have been adapting to both work-from-home set ups and new expectations from customers, a growing volume of office space now sits vacant, while demand for industrial parks as well as storage facilities has soared. With e-commerce rapidly growing as a result of the pandemic, and companies make an increasing number services available via the internet, the local real estate market is likely to never again look quite like it did before the pandemic.

Like with other countries, the pandemic ushered in significant shocks to the Mexican economy in 2020. Declining rates of government spending, private consumption, and investment led to an overall contraction of the GDP by 9%, a rate not seen in Mexico since the Great Depression. International trade, however, began to pick up by the end of the year, and the country’s exports reached activity levels equal to 2019.

The country’s economic situation led, expectedly, to a decline in demand for office space. Mexico saw its largest fall in lease activity during the second quarter, with the third quarter seeing a small recovery whose pace remained steady until the end of the year. According to a report by Cushman & Wakefield, the average availability in Mexico City rate grew to 14.7% across all buildings types, with the rate for class A buildings sitting at 16.8%. Net demand for office space in 2020 fell to -83,920sqm, the first time in more than 20 years the figure dropped into negative territory. In the report, the firm emphasized the significance of such a contraction. While representative of only of less than 1% of the market, considering the large investment and long-term commitment office leases generally entail, such a contraction is indicative of potentially a major change in trends for the market.
Despite Mexico City’s overall dramatic decline in demand for office space, the picture is not the same for all of the city’s submarkets. In buildings along Avenida de los Insurgentes, net demand for office space was actually positive, at 19,817sqm for class A buildings, according to Cushman & Wakefield. The significant discrepancy between demand for space on Insurgentes and other submarkets is perhaps indicative of how important public transportation and accessibility are to firms and tenants. The Cushman & Wakefield report notes that as a means of competing with Insurgentes, landlords in other submarkets were offering concessions and incentives aimed at maintaining current tenants or attracting new ones.

2020 saw asking prices for office spaces fall, continuing on a downward trend that began in the second quarter of 2015, and dipping into negative territory around 2Q2017. By the end of 2020, the average asking price in Mexico City had contracted by 10% from the previous year, falling to an average of USD20.50 per sqm per month, with class A buildings sitting at USD21.51 per sqm. According to Cushman & Wakefield, Mexico City had around 10.2 million sqm of available office space at the end of 2020, of which 1.5 million was vacant, representing an overall vacancy rate of just under 15%.

For the industrial segment, the pandemic played out slightly differently, leaving predictions for 2021 less uncertain. With investment activity falling static in 2020, there was a negligible increase in new demand throughout the country. Within Mexico City, however, industrial real estate submarkets saw increased activity, due in great part to the rapid expansion of e-commerce as major retailers shifted their practices based on consumer demands. As a result, at the end of 2020 the industrial space vacancy rate fell to 3.4%, among the lowest levels recorded, according to the report by Cushman & Wakefield. Additionally, construction activity in the segment fell by 30% from the same time in 2019. Asking rates for class A buildings saw an average of USD5.37 per square meter per month, representing an annual contraction of 4%. Meanwhile, class B buildings saw a fall in annual per month asking price to USD4.20 per month.

2021 will largely be a year of reckoning following the social and economic upheavals that began in 2020 in response to COVID-19. Before the year is done, the long-term effects and changes will have taken shape and the market is likely to begin to stabilize. Currently, the demand and utilization of both office space and industrial parks will continue to transform as the world continues to respond to the pandemic. With the availability of subleased space continuing to grow, plug-and-play office space is likely to become more standardized.

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