Mexico’s Industrial Real Estate Thrives in 2015
By Jones Lang LaSalle
Gerardo Ramirez Barba – Regional Director – Industrial JLL Mexico
Alberto Leon Santacruz – Associate Director – Industrial JLL Mexico
Mexico’s latest growth rates have been reasonable, relative to growth in most countries. The first quarter the economy grew at a rate of 2.6% and the second trimester Mexico’s growth rate decreased to a rate of 2.2%. For the third quarter Mexico returned to a 2.6% growth rate.
The Secretaría de Hacienda expects 2015 growth to be in a range from 2.0% to 2.8%. Banco de México expects the growth rate range to be between 1.7% and 2.5% (in August 2014 B de M expected 2015 growth to be 3.2% to 4.2%). As a reference, Mexico’s 2014’s growth rate was 2.1%. Private banks customer surveys target 2015 GDP growth rate at a median of 2.25%.
Mexico’s economy has closely followed the US’s economic patterns for the last ten years. The US’ GDP growth rates have been robust lately (GDP growth 2.9% for the 1Q 2015, 3.9% for the 2Q 2015 and 1.5% for the third quarter vs a “latest 10 year average” of below 2%). US unemployment rates for August and September were at their lowest since 1953. Manufacturing GDP reached record levels in the second half 2014, reaching almost the same amount for the first quarter 2015 (no additional growth). Analysts such as Wharton Professor Dr. Peter Linneman suggest the reason not to expect a recession for perhaps the next three years is because of an existing lag in housing and residential construction (approximately 1 million unit lag), that has yet to be reduced. The closing of this gap should motivate housing and residential starts, which have a favorable effect in GDP growth rates.
Mexico’s latest inflation figures confirm we are living at the lowest historical inflation levels. The target for 2015 is 3%. The first two weeks of October annual inflation was a mere 2.37%. According to Agustín Carstens, Banco de México’s Governor, low energy costs and lower electricity tariffs along with the recent Mexican structural reforms, and with monetary policy and product gap have contributed to the current low inflation.
Mexican interbank rates continue at a rate of 3%.
The Peso’s FIX exchange rate vs the Dollar was 14.829 at the start of 2016. The FIX currency exchange rate moved to 15.2647 per dollar on March 31st, it moved to 15.6854 by June 30th, and at the closing of the 3Q it was 16.9000 (eight percent value lost in one quarter). As we write (November 20th,) the FIX rate has shown a correction, returning to 16.5120 (parity loss of value was five percent fall relative to the end of 2Q and eleven percent YTD). These movements have obeyed the relative strength of the US economy (a strong dollar) relative to most of the world economies (flight to quality), and the reduction in the oil price, which has an important perceived effect on the Mexican economy. The Peso has fared much better than many currencies including Brasil´s, Colombia’s, South Africa’s and Chile’s.
Banco de Mexico’s US dollar reserves decreased from US $ 193 at year end 2014, before volatility began, to US $ 173 billion on November 13th (a 10 percent reduction). This was a consequence of Banco de Mexico’s daily auctioning of dollars to stabilize the nine month volatile currency fluctuations. Currency has had a relative stabilization period along the last month. This has allowed Banco de México to modify its Monetary Policy regarding currency fluctuations buffering mechanism of auctioning US $ 200 million per day. Now auctions have stopped and will only take place if there is a fluctuation of 1% or more any given day.
The IGEA index (Indicador Global de Actividad Económica Economic Activity Global Indicator) shows the best indexes for Mexico at this time, 2008 = 100. Industrial Production shows 108 and Services 122 points, Manufacturing shows 117 points, Automotive manufacturing shows 210 points. Investment and heavy equipment purchases, of both national goods and imported goods show 135, store sales 118, consumer confidence is at 90 points. Mexican unemployment figures show a rate of 4.25%, historical low since 2008 (3.75%). Mexico’s non-oil related exports are strong, we have had a record year to date regarding light vehicle manufacturing as well as other exports.
Overall Mexico industrial real estate market overview
The third quarter was favorable for Mexico’s industrial markets. Industrial space stock grew substantially. National inventory for the eighteen markets we track now reaches more than 60.47 million square meters, versus our last account of 58 million square meters, or 623 million square feet for the last quarter.
Average rent (not weighted) decreased from US $4.35 per square meter per month on 1Q 2015, to US $4.09 at the end of the second quarter. It has moved to US $ 3.95 at the end of the third quarter. National average rate for Vacancy held steady at the current 6.1% percent
Mexico’s market statistics
Through the 3Q 2015, Industrial activity has maintained positive momentum in Northern Mexico with large infrastructure projects (such as gas ducts) in several states, new automotive plants, such as KIA in Nuevo Leon, and many expansions of established international and local manufacturing companies.
The North Region has absorbed close to 790,000 square meters (~8,500,000 square feet) January to September of this year.
3Q 2015 Average (unweighted) rent has been slightly reduced, adjusting from 2Q 2015 of US $4.03 per square meter per year down to US$3.97
Mexico’s North Region includes important industrial markets such as Monterrey, Ciudad Juárez, Tijuana, Reynosa, and Saltillo accounting for 56% of the country’s stock.
Mexico City, Toluca and Puebla have had new deliveries of space to increase stock from 11’177,726 last quarter, to 11’652,508 at the end of September. Average rent (not weighted) for the Central Region moved from US $4.44 to US$4.22 per square meter per month, all three submarkets suffered adjustments this quarter.
The Bajío Region continues delivery of industrial space. Stock grew almost 10% in the quarter, partly because we added 667,400 square meters of Nissan Aguascalientes plant space. New space was also delivered in Querétaro, as well as in San Luis Potosí..
Something to watch
Mexico continues attracting vehicle companies. Toyota announced a new OEM plant in the state of Guanajuato.
Mexico´s federal government is heading into the end of their third year. This is the midpoint in President´s Peña period. Approval ratings have somewhat improved, the structural reforms he led have slowly gained traction, foreign investment continues and the political climate has settled. Peña changed his Secretary of Education and Aurelio Nuño has done a good job of regaining control from the CNTE school teacher union.
Mexico has continued to grow partly because of investors trust in the country’s future, and partly because of healthy US growth rates.
Reading the clock
Mexico City had very little absorption this quarter, yet construction activity continues, so vacancy levels have moved back from a 3.7% vacancy rate at the end of 2Q, to a more reasonable 4.3%. This 3Q. Lease rates have slid from US$ 5.56 dollars per square meter per month, to US $5.49, should this tendency continue one more quarter, we will consider Mexico City a falling market.
Guadalajara, Guanajuato, San Luis Potosí, Puebla and Toluca are markets with low vacancy rates that have continued absorbing space with a relative balance of supply and demand that has allowed lease rates to remain relatively stable.
Monterrey has continued growing, absorbing 359,835 square meters in the first nine months of 2015, while adding 379,699 square meters of new stock. Vacancy and rents held steady.
No major change in Rising markets, except for an adjustment in Aguascalientes that has brought us to reconsider that city’s status from a Peaking market back to a Rising market. Although Aguascalientes’ vacancy decreased to almost cero, there are vacant spaces asking for very low rents (this does not make much sense). With the Nissan and Infinity/Mercedes plants, we consider this market’s supply and lease rates should increase soon.
Chihuahua, Saltillo-Ramos Arizpe and Reynosa continue to be part of the rising market quadrant as well. Ciudad Juárez, Tijuana and Mexicali held steady. Nuevo Laredo´s rents and vacancy have been upsets, we will monitor next quarter´s results to reconsider a possible change Nuevo Laredo´s status
Only Matamoros continues as a bottoming market. Availability is still 10.9 percent. The City’s mayour announced new service industry investments including the opening of a Starbucks. He claims 19 out of 34 maquiladora plants are under expansion process’. Matamoros and Querétaro are the only markets with double-digit vacancy rate at this time.
Querétaro has seen an important increase in supply, beyond the increase in absorption. Vacancy grew from 9.5% to 12.6% and lease rates decreased. This is a sign of this markets decline into a Falling market. Querétaro has plenty of fields close to the Airport, evidently it is relatively easy to develop new industrial parks.