Outlook is positive for Mexico's real estate, with major retail and multi-use developments in the pipeline

While Mexico’s real estate market shows positive trends in a variety of segments, including residential, retail, industrial, office and tourism, overall 2018 was a challenging year for the sector. The transition of power to a new president, Andrés Manuel López Obrador, better known by his acronym AMLO, and the arrival of Claudia Sheinbaum, mayor of Mexico City, both of whom hail from the left-centre National Regeneration Movement party, introduced new risks and uncertainty relating to government plans and policy for the real estate sector.

Despite the short-term uncertainty, however, there are reasons for optimism. Economic development in key manufacturing cities and a growing population are driving demand for urban housing. According to data compiled by the IMF in April 2019, Mexico was the world’s 11th-most-populous country, with 125.9m people, up from 112.9m a decade ago. While housing stock in the country expanded by 43% between 2000 and 2014, demand growth continues to exceed supply. Between 2013 and 2017 builders shifted away from constructing large-scale, single-family developments on the fringes of cities towards building taller, multi-family residential structures closer to the city centre. The proportion of residential property found in high-rise buildings increased from 3% in 2012 to 35% in 2017. More recently, the federal government is working to recalibrate policies relating to the construction of low-income housing while property developers await clarification on AMLO’s vision for the real estate sector.

While there are dozens of new large-scale malls and warehouses in the pipeline for 2019 and 2020, longerterm growth of the residential, retail and industrial segments will require a major investment in new projects.

Structure & Oversight

The Ministry of Agrarian, Territorial and Urban Development, led by Román Meyer Falcón, is the main institution in charge of overseeing real estate development and urban planning. Within Mexico City, the Secretariat of Urban Development and Housing (Secretaría de Desarrollo Urbano y Vivienda, SEDUVI) plays a critical role in overseeing the country’s most important urban real estate market.

There are two agencies that play key roles in supporting homeownership and addressing the country’s housing deficit. The first is the National Workers’ Housing Fund Institute (Instituto del Fondo Nacional de la Vivienda para los Trabajadores, INFONAVIT), a government-run agency that acts as Mexico’s main mortgage provider. Employers in Mexico contribute to INFONAVIT on behalf of their employees, who are eligible to use the funds to make down payments on residential property. The second organisation is the Mexican Housing Commission, which runs a subsidised programme called Esta es Tu Casa (“This is Your Home”) that assists citizens in making deposits on their new home or in paying for repairs to their current household.

Performance & Size

Nationwide, housing prices rose by 2.9% in 2018, up from growth of 0.7% in 2017. Mexico City is the most important real estate market in Latin America. Over the last two decades developers have built up an impressive stock of office towers, malls, and multi-family residential buildings. Global property advisor Tinsa Research put Mexico City’s population at roughly 16m residents and the number of housing units in the city at 4.5m to give an average of 3.6 people per unit, as of the first quarter of 2019. The municipalities with the largest populations are Iztapalapa (1,815,786), Gustavo A Madero (1,185,772), Álvaro Obregón (727,034), Tlalpan (650,567) and Cuauhtémoc (531,831). Approximately 62% of the city’s residences are owned, while 21.1% are rented. Mexico City has more than 3m formal sector workers who are registered with the Mexican Social Security Institute and are considered high-priority clients by lenders since they can easily prove their income. While real estate development in Mexico City has grown significantly over the past 20 years, it has stalled more recently as the leadership of Sheinbaum conducts an in-depth review of permits granted by her predecessor. In February 2019 Sheinbaum announced that the construction permits granted between 2017 and 2018 had no legal backing, launching an investigation into several major developments in the pipeline. For developers in Mexico City this abrupt shift in urban development strategy has become a major obstacle. Many private sector players argue that Sheinbaum is not sending clear signals about the types of developments her administration will support. “The suspension on major development projects is having a significant impact on the real estate sector,” Ben Wollenstein, managing director at Pantaco, a Mexico City-based logistics centre, told OBG. “There is uncertainty due to a lack of clarification on policy. We predict that big projects will not make much progress over 2019-20.”

Meanwhile, housing sales in the greater metropolitan area of Mexico City are declining. During the second quarter of 2019 the number of residential units sold fell by 8.8% compared to the previous quarter. More notably, the amount of new residential inventory fell from 1971 units to 898 over the same period.

Elsewhere, the Monterrey metropolitan area is the second-most-important real estate market in Mexico, where 75% of housing units are owned and 15% are rented, while the rest is vacant. As of the first quarter of 2019 the state had 4.5m inhabitants and 1.2m housing units, giving an average of 3.7 people per housing unit.

Residential

As the country’s top market for residential real estate, the capital city is finally starting to see a shift away from the construction of single-family homes in the urban periphery towards the development of larger, multi-family buildings closer to the city centre. This trend is likely to continue due to shifting cultural values and changing tastes as more young people enter the workforce and seek their own housing. The top municipalities in terms of available apartment units are Benito Juárez, Cuauhtémoc and Miguel Hidalgo. Middle-income units (valued at between $51,700 and $155,000) account for 40% of apartments in Mexico City, while subsidised housing units (less than $51,700) account for 28%, residential units (between $155,000 and $414,000) for 22%, and residential plus (between $414,000 and $776,000) and premium units (over $776,000) account for approximately 5% each. Some 90% of the residential stock in Mexico City is available for sale, while the remaining 10% is available for rent. Of the residential units for sale, 70% are apartments and 30% are single homes. In the rental market 86% of the residential units available are apartments while the remaining 14% are single-family homes.

In the short term residential construction in Mexico City is seeing a significant disruption as developers adjust to the new business environment initiated by Sheinbaum. “In 2019 the housing supply in Mexico City has decreased because of cancellations and permissions issues with the local government,” Santiago Gil, managing director at Paladin Realty Partners, a Los Angeles-based institutional real estate fund management, told OBG. “Typically, new building permissions are only granted to projects under 5000 sq metres. As such, the lack of supply – especially in the lower-income segment – is forcing people to seek housing alternatives on the outskirts of Mexico City.”

The slowdown in activity in Mexico City, however, is expected to be offset by development in other parts of the country. “One particular secondary city where the real estate sector is growing is Mérida in the state of Yucatán,” José Enrique Gasque, CEO, Skycapital, a real estate investment and development company, told OBG. “As a centre for entrepreneurship and start-ups, there is a lot of activity for high-end vertical development projects to meet the demand from young professionals moving from the rest of Mexico.”

Retail

Despite the slowdown in residential real estate development, industry experts anticipate that other segments will remain unaffected by the political changes. “Since the administration of AMLO took power in 2018, many real estate projects have been put on hold,” Eugenio García, CEO of Central de Estacionamientos, a local car park operator, told OBG. “However, shopping centres and other retail projects are expected to continue driving sector growth through to 2020.”

Mexico City, Guadalajara, Monterrey, Tijuana and Cuernavaca have all seen a recent boom in shopping malls. In part due to concerns about security issues in public spaces, malls have emerged as important social gathering places for many middle-class families. Mexico is also an attractive market for foreign brands from the US and other countries to set up a retail presence. The average price per square metre of domestic retail space in Mexico is 10 times less expensive than in the US.

New retail projects are taking place in the periphery of major cities, and development is expected to continue over the short term. In February 2019 construction began on the MXN3bn ($155.1m) Grand Outlet Riviera Maya in Puerto Morelos, a town near the city of Cancun, and is scheduled to conclude in October 2020. While e-commerce penetration continues to grow, residents remain reliant on brick-and-mortar stores for shopping, and increasingly use shopping malls as family-friendly gathering places for eating, playing video games and watching movies. In 2018 a number of major new shopping centres opened, including La Isla Mérida in the capital of Yucatán, and Explanada Puebla and Paseo Querétaro in central Mexico, which combined were estimated to cost MXN6bn ($310.3m).

Industrial

In spite of ongoing concerns about how Mexico’s internal politics and trade relationship with the US will shape future investment, the industrial segment continues to enjoy sound fundamentals. The industrial occupation rate in Mexico City and Tijuana – one of the country’s main manufacturing cities – was roughly 97% in 2017. Notable new projects in Tijuana include the $21m Vesta Park Lagoeste, which broke ground in March 2018. “Mexico’s industrial real estate market will continue to do well over the next few years, and we are seeing robust activity in Tijuana,” Fernando Arjona, president of Omega Capital Mexico, a Tijuana-based real estate investment advisory company, told OBG.

One industrial real estate market that is doing well is Ciudad Juárez in the state of Chihuahua. Developments under construction in the city during the second quarter of 2019 totalled 167,225 sq metres, up from the 81,290 sq metres recorded a year earlier. With approximately 60% of the industrial space under construction in Ciudad Juárez already pre-leased, Cushman & Wakefield predict that new construction in the segment will continue to grow over the short term.

Much of the country’s demand for new industrial real estate has come from the growth of e-commerce, which expanded by 20% in 2018 to reach a value of MXN396bn ($20.5bn). As such, total square metres used for storage warehouses in the central region of Mexico grew by 6% that year. “E-commerce is growing in Mexico and this is pushing companies to build more and bigger distribution centres around Mexico City to continue expanding logistics coverage,” Luis Gutiérrez Guajardo, president of logistics real estate provider Prologis Latin America, told OBG. “In order to meet the high demand and standards of online shoppers, logistics companies will have to establish a distribution centre near every major city across the country.”

Office

In 2017 and 2018 Mexico City saw a shift towards luxury workspaces, according to the Mexican Chamber of Construction (Cámara Mexicana de la Industria de la Construcción, CMIC). Spurred in part by a major earthquake in central Mexico in September 2017, several businesses are looking to upgrade from offices in older buildings to workspaces in new developments in the Santa Fe, Reforma, Periférico Lomas and Insurgentes Sur corridors. The CMIC estimates that around 30% of the 3m buildings damaged in the earthquake were zoned as office space. According to data from Cushman & Wakefield, the overall rate of available office space in Mexico City was 13% in the second quarter of 2019, compared to 11.1% in the Polanco district and 14.4% in Santa Fe. In the second quarter of 2019 the city had 1.3m sq metres of office space available. Though it had an additional 654,280 sq metres under construction, this was down by 43% year-on-year, a sign that some developers are adopting a wait-and-see approach before starting new projects.

Although the short-term outlook for office space in Mexico City continues to be clouded by policy concerns, the country more broadly is set to benefit from broader demographic trends that signal its emergence as an expanding market. The outlook for Monterrey – the country’s second-largest urban centre – remains positive, with several mixed-use developments and office towers under construction. For example, construction on the MXN3.5bn ($181m) mixed-use SOHL tower in Nuevo León began in May 2019.

Meanwhile, Guadalajara, Tijuana and a number of smaller cities in the Querétaro and Guanajuato states continue to attract considerable investment in real estate projects. “Since 2014 we have seen a lot of development and investment in new corporate towers and office spaces in Mexico City and other major urban markets across Mexico,” John Padilla, managing director at IPD Latin America, an energy consultancy, told OBG. “The question is how occupancy rates will fare if the economy continues to decelerate.”

Tourism

The tourism industry in Mexico is experiencing solid growth, which is having a positive trickle-down effect on the real estate sector. In 2018 the country recorded 41.5m international arrivals, up 5.5% from 39.3m in 2017. According to the World Travel & Tourism Council, the tourism industry grew by 2.4% in 2018. Major tourism centres benefitting from ongoing investment in the sector include the Riviera Maya, Nuevo Vallarta, and Los Cabos. A string of new hotels opened in Los Cabos in 2019, including the Rancho San Lucas, the Four Seasons Resort Los Cabos and Nobu Hotel Los Cabos. Between 2017 and 2021 the resort city in Baja California Sur is expected to add 4700 new hotel rooms to its inventory. Elsewhere, two new hotels, the Sofitel and the Ritz Carlton, are currently being built in Mexico City’s Reforma corridor. The developments are scheduled for completion by the end of 2019.

With new hotel rooms in the pipeline, however, vacancy rates are set to continue rising. According to statistics from the Ministry of Tourism, the country recorded a hotel occupancy rate of 60.9% in 2018, down from 61.2% in 2017. The slight fall could be explained in part by consumer trends shifting away from traditional hotel accommodation to rented private property. “Millennials are changing the supply and demand dynamics of tourism real estate,” Roberto Kelleher Vales, CEO of local property developer Inmobilia, told OBG. “They no longer want to go to traditional hotels; they want to have their own space with flexibility. That is why Airbnb is succeeding in hip destinations like Tulum.”

In light of the strong growth in the tourism segment, some business leaders have emphasised the need for a more comprehensive planning strategy. “It is crucial that developers draw up master plans focused on an integrated approach to urban planning in tourist areas,” Roberto Calvet, managing director of Mexico at AECOM, a US multinational engineering firm, told OBG. “Over the decades many areas in Mexico have been overlooked in favour of fast expansion. Without master plans and pragmatic zoning there will be significant environmental degradation. Therefore, we need to encourage and legislate for sustainable development that also promotes social inclusivity.”

Outlook

Housing prices in Mexico dropped by 1.1% during the first quarter of 2019 compared to the previous quarter. Although investment in the sector is somewhat dampened by the new administration’s lack of clarity on policies related to real estate development, experts remain optimistic about the country’s medium-term prospects. According to industry insiders, after 20 years of significant economic growth and major investments in new infrastructure and multi-use developments, Mexico’s real estate sector is resilient enough to weather the short-term concerns and uncertainties. Long-standing trends are set to continue as local and state governments and business chambers in Cuernavaca, Tijuana, Mexico City, Monterrey and Guadalajara, among other cities, work to facilitate continued investment in a robust real estate market.