Mexico City offers variety of high-quality office rental space

About 90% of large companies present in Mexico secure their office space by renting, leaving just 10% owning their facilities. In 2016 most rents in central Mexico City ranged from $17 to $26 per sq metre, depending on the quality of the space. An estimate by Colliers International placed total office space inventory close to 8.3m sq metres. Around 3.5m is of the highest quality, described as A+; 1.8m is class A; and 3m is class B. Real estate consultancy CB Richard Ellis (CBRE)reports slightly different numbers, estimating that total office space supply is 9.5m sq metres, of which 4.9m are either class A+ or A. In recent years new office space has rented very quickly, leading to occupancy rates of just under 90%. Capitalisation rates – annual income from a property as a proportion of capital value – were around 10% in 2011, but moved down to 7-8% in 2015 and 2016.

The office market in Mexico City grew at a steady rate during 2016 as a total of 26 buildings in the A and A+ categories were completed in 2015, adding 566,000 sq metres, or 11.2%, to the existing stock. Coldwell Banker Commercial estimated that in 2016-20 about 500,000 sq metres would be added each year.

Corridors

Office space in the capital can be categorised into 10 corridors including Insurgentes and Periférico Sur in the south of the city, Polanco and Paseo de la Reforma in the centre, Santa Fé and Bosques in the west, and Norte and Lomas Palmas in the north. The relative attractiveness of the different corridors has been subject to change. Up until 2014 the Reforma corridor was the most prestigious and desirable, often referred to as the “golden mile”.

However, according to Gonzalo Robina, director-general of the FIBRA Uno real estate trust, it has been displaced by the Lomas Palmas corridor for two main reasons. First, the Reforma corridor has largely run out of space for new tower projects and second, the completion of a cluster of new buildings in Lomas Palmas has made its rental market more dynamic, even though it has the city’s highest rents, up to $34 per sq metre.

Supply-Side

There has been some concern regarding potential over-supply of office space, with the portion of empty offices rising to 14% at the end of 2015 compared to 10.1% in 2014. In September 2016 office developer Grupo Gicsa was reported to have cancelled an office redevelopment project in the Reforma corridor because another of its nearby projects, completed two years earlier, was still only 60% occupied. Average office rents in the third quarter of 2016 were $25.55 per sq metre, according CBRE, which predicted that the rate would fall to $24 by 2018. Pedro Azcué, chief executive of JLL Mexico, has suggested that the office vacancy rate could edge up to 19% by 2018. Conversely, softer rents are good news for tenants. WeWork, a US-based shared working space company, said it was able to open its first office in the Reforma corridor area of Mexico City in September 2016 at rental rates approximately 30% below what it was expecting to pay. Patricio Fuks, head of WeWork Latin America, said, “Landlords are waiting for you with open arms.”

Market Trends

Construction companies and investors highlight some trends worth monitoring in the office rental segment going forward. One is that a growing 20% of office workers are millennials, a generation more used to open-plan working and likely to demand powerful broadband connections as standard. Another movement associated with the younger generation is the spread of co-working spaces. One supplier of such space is IOS Offices, which offers 30 spaces in 10 cities, totalling around 60,000 sq metres and catering to 10,000 users.

A related trend, partly reflecting the scarcity of development land, has been the growth of smaller office buildings on secondary streets within main office corridors, usually offering less than 20,000 sq metres each. These facilities are particularly attractive for start-ups and small and medium-sized companies. At the beginning of 2017, some 54% of the 39 office blocks under construction in Mexico City were smaller units.