Mexico City warehouse market unfazed by slow economy

Mexico City warehouse market unfazed by slow economy

East and West Coast port volumes are growing, but Mexico City, with 22 million people, remains Mexico's distribution hub. Photo credit: Shutterstock.com.

MEXICO CITY — The Mexican economy may be contracting, but there’s no slowdown in the rising rental rates for industrial distribution properties. The reason is e-commerce, coupled with historically low vacancy rates for warehousing and distribution sites, industrial real estate developers said at the JOC Mexico Trade Conference this week. 

The national warehouse and distribution vacancy rate is 5.2 percent, a historic low, but vacancy rates are even lower in Central Mexico — the markets surrounding Mexico City — with its population of 22 million. In Mexico City, the warehouse vacancy rate is 3.6 percent, according to Gerardo Ramirez Barba, executive vice president and regional director for Mexico at JLL.

“The central markets are Mexico City, Puebla, and Toluca,” Ramirez said. “These markets have been growing a lot, growing at an average of 7,000 square meters a year in the last three to four years.” 

E-commerce, he said, has been the “game changer.” “Amazon, Walmart, Home Depot, they are transforming distribution through e-commerce and changing also the buildings,” said Ramirez.

The trend toward multi-story distribution buildings, with mezzanines and sometimes mixed-use space, is taking hold in Mexico as well as the United States, Japan, and other countries, Ramirez said. In part, that’s because land is increasingly hard to come by, as the rapid expansion of distribution centers and networks consumes available space.

“There’s a pipeline of development, and there’s a lot of construction going on in Tijuana and Juarez,” along the United States border, said David O’Donnell, president and CEO of real estate developer O’Donnell. “As the Mexican economy slows, we’ll see that construction slowing, but we won’t realize it for six to nine months” after the contraction begins, because of the backlog, he said.

In Mexico City, “if you need a large distribution center, you have to wait until it’s built,” Ramirez said. The development of industrial real estate in Mexico has grown at a compound rate of 5 percent over the last 10 years, he said, outpacing the Mexican economy as a whole. Much of the development has been just north of Mexico City, where land is becoming scarce, he said.

Mexico City dominates 

Mexico City and the central region, which includes the cities of Puebla and Toluca, will remain a warehousing magnet, despite the growth of business around Mexico’s ports and the development of industrial clusters across northern Mexico and in Bajío, a major manufacturing center to the west of Mexico City, O’Donnell and Ramirez said.

“The key consolidation point of cargo has been and will continue to be in Mexico City,” O’Donnell said. “There’s little consolidation being done at the ports. In the US, ports have big consumer markets and in Mexico they don’t. Everything comes to Mexico City, is consolidated, and is sent out from there. You have 20 percent of Mexico’s population in Mexico City.”

That points to a logistics infrastructure problem that will be magnified as Mexico’s economy and imports grow over the long term. With few industrial or large consumer bases near ports, and few inland intermodal container yards in Mexico, distribution networks could be hampered by an aging hub-and-spoke network that doesn’t serve Mexico’s growing industrial clusters well.

That may drive more manufacturers and distributors to search out locations in more disparate parts of Mexico, using direct transportation routes as infrastructure improvements on road and rail are rolled out. Some businesses may try to reposition distribution facilities closer to seaports to take advantage of sea routes to the United States, Ramirez said.

“As the economy grows and the port cities expand, we should see more development there,” O’Donnell added. 

The same is true for cities in Northern Mexico near the US border. Ramirez noted that Sweden’s IKEA recently opened a factory in Saltillo, an hour from Monterrey. “If I asked people a year ago if they would have foreseen that, they would have said no,” he said.

“We need to understand all manufacturing in Mexico has one single purpose,” said Manuel Diaz, managing director and partner at Seko Logistics Mexico. “The reality is we have one customer in a really big, beautiful market. They pay us on time, pay us in dollars, and treat us well, despite what Mr. Trump may say. That’s why [we] see a real need for warehousing space.”

Contact William B. Cassidy at bill.cassidy@ihsmarkit.com and follow him on Twitter: @willbcassidy.