Real Estate & Construction

Mexico’s Industrial Real Estate

Mexico is on the verge of a nearshoring renaissance, which has led to a boom in the industrial real-estate sector.

The real estate sector is recovering slowly but surely in Mexico. Construction activities showed growth in early 2022, despite inflation and the increased prices of construction materials. Civil works commissioned by the federal government as well as the states are leading the market.

But somewhat unexpectedly, the growth trend is almost as significant in the industrial real estate sector. Perhaps this would not be so surprising if we took one factor into consideration: the rise of nearshoring in Mexico has raised the demand for industrial real estate.

This was partly caused by disruptions in intercontinental offshoring supply chains during the pandemic. “Companies [are now] investing in production closer to home so that they don’t have to deal with global sourcing challenges,” observes an article by Fortune. The closest and most trustworthy manufacturing hub for North American businesses is still one place and one place only: Mexico.

Nevertheless, there is also a political side to the story. With the US’ increasing mistrust of China and its politics, American businesses are encouraged to restrict their dependence on Chinese suppliers and subcontractors.

Such businesses are naturally turning to Mexico for nearshoring operations. This has so far led to a limited but promising revival of Mexico’s manufacturing sector, and the nearshoring wave has been gathering momentum in recent months.

Well-known credit analysis firms such as Fitch Ratings have made favorable forecasts for the industrial real-estate sector in the country. Fitch Ratings believes industrial properties will see a steady growth in their rental prices throughout 2023. Or probably for a bit longer as “logistics and distribution facilities near airports have contract terms usually ranging between three years and five years,” as Fitch Ratings concedes.

Even this may be a rather conservative forecast, given the fact that nearshoring contracts are usually signed for longer periods—at times up to a decade. Judging by the current nearshoring renaissance in Mexico, properties with an industrial application are likely going to be in demand for many years to come.

Admittedly, construction has become costlier after the pandemic and the onset of the current wave of global inflation. “New industrial developments are experiencing construction costs around 25% higher than pre-pandemic cost levels,” according to Fitch Ratings. Nevertheless, rental rates are growing quickly enough to make investment in industrial developments reasonably profitable.

The sector is keen to attract international investment. Selective investment in different segments of the Mexican real estate sector is led by trusts known as fideicomiso de inversión de bienes raíces, often simply known as FIBRA. Simón Galante, president of the Mexican Association of Real Estate FIBRAs (AMEFIBRA), recently told TBY that, “We need to reengage the international community in FIBRA investments in Mexico. When we went out to market, there was great participation from institutional international investors, and now we need to return.”

All that said, finding the right venue is not always an easy task. Manufacturing operations in on par with standards expected by international investors require the right amnesties, adequate square meterage, and—as always with real estate—the right location. Lands near railways and the US border are particularly in demand, though Mexico enjoys over 130,000km of world-class highways which ensures the transportation of cargo from any part of the country to the US in under 24 hours.

Indeed, Mexico’s nearshoring framework offers a whole host of incentives to foreign manufacturers. Nearshoring projects executed under a “shelter operation” with the right license, including the IMMEX program, are exempted from the country’s 16% value-added tax (VAT) for the import of their equipment and materials. Such exemptions are contributing to the industrial real estate boom in the country.

Other factors desired by investors and foreign nearshoring clients include the availability of the needed skilled and semi-skilled labor force in the area as well as proximity to the local vendors, service providers, and suppliers whose presence adds synergy to nearshoring operations. As such, the country’s human capital is also playing a role in the industrial real estate sector.

With the internationalization of the country’s industrial real estate sector, we have seen some attempts by the authorities to give the market better transparency and regulatory practices. The so-called back-door relationships that are common in certain parts of the Latam region have become increasingly useless in Mexico to secure a good deal.

Industrial real estate is also an investment opportunity for foreign nationals, as they can legally own property in the country, though there are certain restricted zones, including 100km from international borders. Local lawyers and consultants, meanwhile, continue to come up with innovative ideas such as company registration or forming partnerships to let foreign nationals benefit from the sector and its good prospects.