The robust growth observed in Mexico’s industrial real estate market, driven by strong demand for spaces due to nearshoring, may be affected by the upcoming presidential elections in Mexico and the United States, potentially impacting the pace of relocation, according to Fitch Ratings.
Fitch Ratings mentioned that as new companies are entering the country, real estate companies are acquiring and developing new industrial properties to capitalize on Mexico’s strong industrial real estate market fundamentals. These include exceptionally high occupancy rates, nearly 98%, according to the Mexican Association of Industrial Parks.
“Several issuers rated by Fitch have increased their capital spending plans and expanded their investments in industrial space to meet the high demand for storage, manufacturing, and other industrial infrastructure by multinational corporations,” it stated.
The speculative leasing poses a risk to commercial real estate markets with unusually strong fundamentals, including unsustainably low vacancies. However, so far, Fitch believes that the significant demand for industrial real estate in Mexico is supported by economic fundamentals, including the momentum of nearshoring.
“Nevertheless, a potential economic slowdown in the United States and the upcoming electoral processes in both Mexico and the US could impact the pace of nearshoring,” it emphasized.
“We expect sector participants to proactively adjust their investment plans as economic conditions change to maintain healthy credit metrics, including adequately conservative unencumbered assets and net debt/EBITDA leverage,” it added.
Additionally, Fitch noted that the challenges facing the sector in meeting space demand include insecurity, insufficient infrastructure, and inconsistent regulatory framework.
“The lack of adequate infrastructure, security concerns, and an inconsistent regulatory framework are challenges the real estate sector will face in meeting the demand for industrial space,” the rating agency said.
“The cost of addressing some of these risks can increase investment requirements and exert some pressure on profitability and capitalization rates. This may be exacerbated by higher interest rates, construction costs, and land prices, but also mitigated by rising rental rates,” it added.
Fitch stated that the current trend of nearshoring could be positive for Mexico’s commercial real estate (CRE) sector by supporting strong occupancy rates and rent growth, leading to substantial portfolio growth, including through development.
“In this context, companies will need to balance growth with maintaining healthy credit metrics commensurate with current ratings, in the context of weakening economic conditions and global growth,” it noted.
It highlighted that Mexico stands to benefit significantly from the new dynamics of the global supply chain, mainly due to its proximity to the United States and the USMCA trade agreement.
“Foreign direct investment (FDI) increased by 48% year-on-year in the first quarter of the year to $18.6 billion, and the Mexican government has identified $48 billion in private investment, of which $30 billion is expected in 2023,” it explained.