As industrial real estate thrives, more challenges arise

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Editor’s Interview

The industrial real estate market in Mexico has been growing in the last few years, but the sector faces many challenges to be more competitive at a global level. For the next two years, Pablo Charvel will lead this sector in Mexico as the new President of the Mexican Association of Industrial Parks (AMPIP).

He believes the industrial real estate market needs to be upgraded and become more competitive through best practices and certifications should be encouraged.

Pablo Charvel shared with MEXICONOW his insights and forecast for the industrial real estate market in Mexico and his commitment as the new AMPIP President.

MEXICO NOW. -

How did the industrial and logistics real estate market in Mexico perform in 2015?

Pablo Charvel. - The industrial and logistics real estate market performed really well in 2015. Although the growth of the economy has been lower than expected, the occupation of industrial space in Mexico has grown. An explanation of a good occupancy is found in the high correlation between the industrial real estate market and foreign direct investment inflows, which from January to September 2015, amounted to US$21.5 billion, an increase of 18.1% over 2014.

Another important factor influencing industrial occupancy is the demand in the U.S. market. For October 2015 alone, 270,000 new jobs were created in the U.S. a figure higher than expected. As the market grows north of the border, Mexico’s follows.

What is your forecast for the market in 2016-2017?

2015 was a very dynamic year for the industrial real estate market, with an important growth in new construction as a result of the arrival of new suppliers for the automotive and aerospace sectors.

In 2016-2017, Mexico’s economy will benefit from a stronger U.S. economy as well as from the depreciation of the peso and the easing of problems in the construction sector. The implementation of important structural reforms has also improved the business climate, consequently, investment is picking up, and manufacturing activity is gradually accelerating, supporting a robust formal job market, boosting household incomes and consumption growth.

My forecast is that the market growth will continue, driven mainly by the automotive industry. Mexico expects to produce five million light vehicles annually by 2020, representing a 56% increase from the country’s 2014 output.

Logistics will grow as well due to increase in manufacturing and because of the e-commerce demand for larger spaces.

Mexico will continue to be attractive to investors because of low operating costs and the large number of free trade agreements the country has in place around the world.

As the new President of AMPIP, what are your main goals for the next two years?

To reinforce the positioning of the association with the main stakeholders related to the industry, which include: first of all, the federal government in the areas of economy, legislation, energy, water and environmental protection. Also, with the areas in charge of investment promotion, such as ProMexico, and finally, with private business associations representing those sectors with major presence in industrial parks, like auto parts and aerospace, among others.

We need to increase our competitiveness with the promotion of best practices in industrial parks. Specifically, I would like to contribute by growing the number of certified parks under the Mexican Standard of Industrial Parks, under the Green Park Recognition granted by AMPIP, and under NEEC Standard (Authorized Economic Operator) for security.

We will be participating in a proactive way with the Federal government in the development of new Special Economic Zones, a project announced by President Peña in November 2014, whose initiative of Law is now in Congress for approval.

The intent is also to grow the internationalization of our association participating in forums and establishing alliances with foreign organizations. We will promote the Mexican model of industrial parks, especially in Latin America, as a way to position the country as a competitive location for foreign direct investment.

Have industrial parks benefited yet as a result of the Energy Reform?

The cost of electricity in Mexico is getting cheaper, with an average reduction of 2.4% during the first months of 2015. This has made our country more competitive and has been an important reason to attract manufacturing projects to our industrial parks. In January 2016, Mexico will start a new era of electrical supply, with a new power market open to private investment.

Private power companies will be free to compete in generation, transmission, distribution and commercialization of fuels and in the supply of basic inputs for the industry. This means that rates, revenues and profits for market participants, will vary according to supply and demand, innovation and regulations.

The biggest impact as a result of the Energy Reform will come in the next few years when the real competition begins between the private power companies. We will see lower costs of energy and an increase in quality and service.

What are the main issues industrial parks will face in the next few years?

More than 80% of the tenants operating within industrial parks are manufacturing companies. Although Mexico has important strategic advantages to attract new foreign companies such as its geographic location, competitive costs, market access and talent, the availability of local reliable suppliers is still a big challenge that we as a country have to improve. The government needs to work more with small and medium sized companies with training, quality certifications and financing, in order for them to be able to supply national and regional production chains.

Industrial developers can offer a Class A building to tenants, providing competitive rents; connectivity and excellent services to, but to offer a competitive location, there are factors that are out of our control. An important issue is to have a business environment that facilitates new investments. Corruption, security and legal uncertainty are still some of the aspects that we have to improve as a country.

How large of an impact do you expect e-commerce to have in demand for space?

As E-commerce is exploding in the U.S. market, it ripples down to Mexico; therefore, this is becoming an important factor for the design of new distribution buildings. Companies involved in this business, such as FedEx, UPS, Amazon, etc., are demanding more infrastructure like heavy conveyors, more electricity, higher clear heights, as well as greater quantity of loading and unloading docks. That is why tenants are more likely to decide for a BTS project according to their specific requirements, rather than renting an existing space.

Furthermore, in Mexico, we have additional challenges for e-commerce operations, including transportation and connectivity throughout the country and the need to make border crossings more expedite by customs.

Besides the auto sector, what other industries are likely to have above average growth in the next few years?

The aerospace sector in Mexico is booming. In the past ten years, our country has gained an important experience in high-tech sectors, with talented human resources that have made possible the attraction of more than 300 global companies participating in manufacturing, aircraft maintenance, repair and overhaul, engineering and design, located in 18 states in the north and center of the country.

The medical devices sector is also big and dynamic. According to ProMexico, the country is the #9 producer of medical devices worldwide and the #1 in Latin America, as well as the #1 supplier to the U.S. market. Through 2020, the production of medical devices in our country will increase 6.4% annually, a growth exceeding the countries with large production in this sector such as the U.S., Japan, Germany and Switzerland.

What can the federal government do to improve the competitiveness of industrial parks in Mexico?

We need to work closely with the authorities. The development of a new industrial park implies several stages, which can be very difficult to advance without the facilitation from the government. Infrastructure is needed to have better and more efficient mobility on our roads, ports, railways and airports. We need expanding municipal services to sustain the growth of our sector. Government authorities should be more sensitive to what goes into building a new industrial park. It implies strong investments, which at the same time will generate a significant number of jobs.

With the U.S. Fed starting to raise interest rates, what impact shall we expect in Mexico’s industrial real estate market?

Any factor affecting the level of financing will influence the level of rents. Therefore, any increase in interest rates will necessarily affect the development of new industrial areas.

The development of industrial parks is a long-term business that requires a lot of capital for land acquisition, land development, management of permits and construction of inventory buildings for lease. Throughout this process, the proper planning of financial engineering is crucial.

How large is AMPIP today in terms of members, total roofed area or number of tenants?

Founded in 1986, AMPIP currently has 56 corporate members; categorized in private developers, state governments, investment funds and REITs. Altogether, we represent about 230 industrial parks located all over the country, with 2,300 tenants from the manufacturing industry and logistics operations.