As Mexico’s Commercial Real Estate Soars, Second Tier Cities Attract First-Rate Attention

Mexico’s commercial real estate industry is experiencing a second wave of growth brought about by the creation of investment trusts, significant changes in regulations, competitive land prices and …

A view of Queretaro

Mexico’s commercial real estate industry is experiencing a second wave of growth brought about by the creation of investment trusts, significant changes in regulations, competitive land prices and the economic development of new business centers across the country.

According to The Mexican Association of Real Estate Professionals, the sector is expected to see a growth of 6% in 2014, which, according to its president, Martha Ramirez Gallegos, will exceed the predicted 2.77% GDP growth for this year.

In a recent annual survey conducted by The Association of Foreign Investors in Real Estate- (AFIRE) Mexico was listed as the third highest emerging country for commercial real estate investments, following China and Brazil. Without a doubt, this real estate boom is reflected in the growing number of residential, commercial and industrial construction projects being carried out in Mexico City, Monterrey, Guadalajara and Queretaro, to name but a few.  These are literally changing the face of the country.

Alestra’s largest data center in the country, in Queretaro, was chosen because of the available telecommunications network, the electricity supply, the proximity to the nation’s capital and the cost of land per square meter.  

The Roots of Growth

According to Jorge Castañares, business director for Aguirre Newman Mexico and specialist and professor of real estate, the creation of the Real Estate Investment Trust (FIBRAS) as well as the Capital Development Certificate (CKD) jumpstarted the second wave of growth in this sector; the first wave was experienced in 1994 when the North American Free Trade Agreement (NAFTA) was signed. “In 2005 the Rental Tax Law was modified, entitling certain legal and trust entities to a fiscal allowance enabling them to absorb said tax and allowing structured long-term investments,” Castañares explained. Currently there are eight FIBRAS operating in the country that invest in real estate through the Mexican Stock Exchange and whose value has been estimated in the region of 170 billion Mexican pesos (US$13 billion).

Mexico has again become attractive to the energy industry; the manufacturing industry and corporate industry, Castañaressaid. Moreover, several businesses are returning to Mexico after having previously moved their operations to China in search of cheaper labor.  This does not mean that the salaries are now cheaper in Mexico, but rather that a better qualified work force has been made available, in closer proximity to the United States market.

At certain border cities, such as Tijuana and Ciudad Juarez, traditionally known for their textile industries, things are gradually recuperating and statistics show that violence is falling.  “Not as many businesses are leaving when compared with the situation as it stood a few years ago.  On the contrary, they are returning to occupy some of the spaces that had been left empty,” states Victor Lopez Beltran, expert in Latin American businesses and Associate at Market Shanga (a strategies and operations consultancy firm).

As well as those already in place, over the last few years several industrial, logistic, business and techno parks have been built.  These currently cover around 50 million square feet, spread out over 300 industrial parks of international quality. The amount of available office space has also shot up outside of Mexico City, in areas such as Toluca, Puebla, Hidalgo and the Bajio region. It is estimated that currently there are in the region of 4.5 million square meters of class A and B offices in Mexico, a figure that could well be doubled by the year 2020, states Castañares.

Valuable Space

The real estate market is closely linked to the country’s economy. When the real estate bubble burst in the United States and Spain, for example, it set off a far-reaching financial crisis toward the end of the last decade.  The global markets have stated to recover gradually, but the Mexican market has shown, at least to the experts, real signs of growth.

“As the economy grows, the rent or resale prices of commercial sites go up. Without a doubt, this is a good indicator of economic growth,” states Lopez.  He affirms that the real estate sector is tied in to practically all economic activities, as, at the end of the day, they all need a physical space in which to operate.

Land and office prices vary according to factors such as supply and demand, public services, available infrastructure, location, governmental support, size of the population and intended use (be it residential, commercial, industrial, etc.)

Early in 2014, ProMexico published a study regarding the price per square meter of land for industrial use across Mexico City and 52 other locations. The study, based on facts supplied by the Colliers International Real Estate Firm, revealed that the highest prices are in Queretaro, with an average of 2,793 pesos (US$262), rising to as much as 4,781 pesos ($370.86).  This was followed by Mexico City’s Federal Disctrict, with an average price of 2,152.80 pesos ($167); Pachuca, Hidalgo, with 1,951 pesos ($151); Tijuana, Baja California with 1,799 pesos ($139.50) and Guadalajara, Jalisco with 1494 pesos ($116).

However, businesses that contract installation areas for commercial and industrial use can find prices ranging from $55 to $75 in the Federal Distict, $50 to $60 in Guadalajara or Monterrey and $40 to $50 in Querétaro.

Last February, Alestra inaugurated its fifth and largest data center in the country, in the city of Queretaro.  According to Hector Sanchez Madera, Alestra’s manager and network and infrastructure engineer, the location was chosen because of the available telecommunications network, the electricity supply, the proximity to the nation’s capital and the cost of land per square meter.  Locations such as Toluca, Puebla and the outskirts of Mexico City were also considered.

“It was an exhaustive search,” Sanchez stated, “in the end we found an extremely competitive price on an industrial park that set things in motion. It has huge potential for growth.” Sanchez noted that prices there are currently around $70 a square meter, which is considerably lower than the $150 needed to purchase a square meter in the Mexico City metropolitan area. Moreover, it was proving difficult to find a location with the dimensions required by Alestra for the new data center, some 16,000 square meters, with a view to further expansion.

In Tijuana startups and technology businesses also have shared spaces at their disposal, such as the BIT Center (Business Innovation and Technology Center).  These shared spaces of up to 10,000 square meters can be used for commercial activities, attention to clients and exhibitions. The BIT Center opened in 2012 as the first space of its kind in Baja California and looks to strengthen small and medium size businesses in the IT sector, helping to increase their exportation potential, link the academy with the productive sector and generate solutions that promote the use of technology within the community through the constant training and development of the region.

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The businesses have access to available spaces ranging from nine by four meters or more, all with internet connection, electricity, telephone connection, conference rooms, parking, security, and 24 hour access, amongst other services. These spaces cost an average of $14 a square meter.

Available Human Resources

In recent years Mexico has experienced a marked tendency toward decentralization; in other words, more and more services and technology businesses are looking to base their companies in “secondary cities.”

During his career in real estate, Lopez has seen many companies make the decision to set up in these secondary cities, taking into account aspects such as price per square meter, required investment, taxes, government funding and available human resources. “Without a doubt, one of the biggest determining factors is availability of work force,” he stated. “It’s important there be adequately qualified personnel in the areas where the corporate or filial offices will be situated; for some firms it is also vital to find out how many engineers graduate each year.”

The level of training is an extremely important factor, even more so than wages. While salaries vary according to expertise, the salary of a call center operator, for example, is twice the minimum wage in the majority of cases. “The businesses do not intend to exploit the youngsters. Mexican legislation, as well as state and local governments, ensures that work regulations are met by all businesses,” Lopez added.

According to Jesus Palomino, general director at the Guadalajara Intel Design Center, the availability of human resources has been key to its operations.  In Guadalajara there are an impressive amount of educational institutions. “This is where the second largest public university in the country is found, as well as some of the most important private universities.  These keep us supplied with talent.  It’s a cluster that is ready and willing to collaborate with the industry,” Palomino said.  Currently, the Intel Design Center has 900 employees and is about to move into its new headquarters.

Bajio, the Place to Invest

KPMG’s survey “Mexican’s Upper Management Outlook for 2014” reveals that 45% of the Mexican executives that are looking to expand their operations in Mexico over the next three years will do so by expanding into the area known as the Bajío region, which encompasses the states of Aguascalientes, Guanajuato, Queretaro and San Luis Potosi.

“The fact that nearly half of the country’s executives are interested in investing in the Bajio region shows the possibilities for its economic and business growth over the next few years,” states Ricardo Arellano, the associate in charge of the KPMG office in Leon, Guanajuato.

The real estate industry has developed significantly in this area. According to Castañares, the area has become one region instead of four separate states. “They will be complementary states that offer commercial, manufacturing, hotelier and residential possibilities; they will become a macro region where complementary real estate services will be provided,” Castañares said.

There is amazing potential for growth for all the industries providing services to these kinds of industries. “They will be installed in an orderly way in this macro region, knowing where they are to be located and why,” Castañares added.

According to the specialists, the development and growth of this region, along with other parts of the Mexican Republic, has contributed to the progress seen in the real estate sector. Castañares said this has generated employment and is considered to be the driving force behind the economy. “The secret to real estate development is that it grows with the country,” he stated.

Although the general consensus is optimistic, the Economic Ministry’s recently revised expectations of 2.77% national growth have prompted conservative forecasts from experts. “If the country does not regularly increase by at least 3.5% over a reasonable period, it runs the risk of investors slowing down.  The sector moves according to demand,” Castañares said.

So, the greatest challenge for the Mexican government is to accelerate the infrastructure plan required by the country, spend prudently, promote the creation of new businesses and thus generate employment, as sustainable growth is needed,  Castañares added: “What is happening in the sector is extremely interesting, while, at the same time, it is worrying that the economic stability is generating only slow growth.”

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