The industrial market has been soaring across the U.S. border in Mexico. Three experts took the stage at I.CON West this week to discuss the current state of the industrial market in the country, which areas are poised for growth, and the challenges for companies building or investing in the Mexican market.
Rafael Arias, vice president, head of capital deployment Mexico, Prologis, and Rafael McCadden, industrial and logistics director CDMX, Colliers International, offered insights along with moderator Daniel Quezada, associate, U.S. industrial/logistics development, Affinius Capital (formerly USAA Real Estate Company).
Here are top takeaways from their discussion:
The Mexico market is tight. Prior to the pandemic, the typical vacancy rate was around 5%. Today, it’s less than 1% in the six markets where Prologis does business: Guadalajara, Juarez, Mexico City, Monterrey, Reynosa and Tijuana. Preleasing is outpacing supply and driving rents upward. The size of the Mexico industrial market is roughly 600 million square feet, equivalent to the size of California’s Inland Empire.
Nearshoring is driving demand. Monterrey has been capturing most of the nearshoring opportunities along the border areas of Mexico, highlighted by Tesla’s recent announcement of its Gigafactory, a new battery-production facility that will be just across the Texas border. Fifty of Tesla’s suppliers are already in the area, and more are expected to follow to be close to the new facility.
Workforce challenges are fewer. The border markets are in close proximity to more than 50 million skilled and educated laborers, making this area the most desirable among other Latin American countries. Labor costs are steady, compared to rising rates in China. On average, a salary in Mexico is one-eighth of a comparable position in the U.S.
Location, location, location. Real estate’s most famous adage is true, as global companies relocate facilities closer to consumers and in areas largely unaffected by a trade war between the U.S. and China, pandemic-related restrictions, shipping and supply chain troubles, and more. Following the 2011 Fukashima nuclear power plant disaster, some 400 Japanese companies moved to Mexico. Within the last 12 months, 40% of transactions in Mexico were Chinese companies expanding into the market, and panelists predict this boom will expand for the next decade.
E-commerce has room to grow. Younger generations in city centers are driving e-commerce demand, now comprising 13% of retail sales; up from 8% pre-pandemic. Compare that to the U.S., where online shopping accounts for approximately 26% of retail sales – growth is inevitable. Amazon’s footprint in Mexico is relatively small as it faces competition from companies including Mercado Libre and Walmart.
Power is the number one challenge. Access to strong, reliable power is critical to manufacturing and assembly facilities. Private development investment is hindered by unique challenges of the country’s electricity regulation, needed federal investment in infrastructure, and skyrocketing costs of securing power rights. While government officials are beginning to understand these implications and are examining other sources of power, like wind and solar, the solutions aren’t quick. Additionally, water usage, conservation and recycling must be considered, particularly for companies with ESG initiatives.
The opportunities are endless. In the next five years, Mexico is expected to attract $35 billion in foreign investment, and the country needs to be prepared with the land and facilities to support it. Eighty-five percent of products assembled or manufactured in Mexico cross the border into the U.S., thanks in part to the U.S.-Canada-Mexico trade agreement and nearshoring. This puts Mexico just behind Canada in terms of trade volumes with the U.S. But, as the panelists pointed out as they touted Mexico’s advantage, which would you want more: maple syrup or tequila?