The decision whether to rent or to buy industrial buildings in Mexico is an important variable in a company's business strategy.
In the last few years, the surge in demand of final consumers and dependance on Asian manufacturers have created an area of opportunity for Mexico, which has historically been an attractive market to set up industrial buildings given its privileged geographical position and skilled labor availability.
Mr. Patricio Gutiérrez Tommasi, CEO Frontier Industrial by Artha Capital, believes that the current tensions between the United States and China, together with the breakdown of supply chains caused by the COVID-19 Pandemic, have put Mexico in the perfect spot as Mexico has every competitive advantage for companies to choose to establish there and meet the demand of mature markets such as the American.
In this context, Mr. Gutiérrez Tommasi points out that Mexican industrial real estate has been developing for years and is now mature enough to welcome global businesses in the most active areas of the country like Tijuana, Ciudad Juárez, Monterrey, Mérida, Jalisco, Estado de Mexico and the Bajio. “Developers and government authorities work together to offer companies high-quality, fully serviced industrial parks and buildings, making us very attractive and with a competitive edge.”
Companies base the decision to buy or rent industrial buildings on specific locations depending on whether it is for manufacturing, distribution or warehousing. “Car manufacturers use a business model that seeks to own their industrial buildings whereas distribution and ecommerce businesses opt for fixed leasing contracts with the objective to grow in the long term,” explains the CEO.
If the location works out for the businesses, they are already halfway through. Other factors such as existing infrastructure, services (electricity, water, gas, etc.) and type of industrial building will also define the cost-benefit ratio.
Mr. Gutiérrez Tommasi mentions that investors are keen on build to suit projects as these projects arise from a client’s specific need to have an industrial space and therefore they commit to pay fixed-term rentals even before construction begins. This definitely reduces uncertainty for investors vs speculative construction, which implies investing without already having a committed client.
Similarly, he declares that industrial park developers prefer to rent out industrial buildings, whether in speculative projects or build to suit projects. “This is because the project 's capital structure is designed to obtain returns over time.”
“The investors are keen on build to suit projects as these projects arise from a client’s specific need to have an industrial space and therefore they commit to pay fixed-term rentals even before construction begins. This definitely reduces uncertainty for investors vs speculative construction, which implies investing without already having a committed client.” Patricio Gutiérrez Tommasi, CEO Frontier Industrial by Artha Capital.
Buying industrial buildings
a) Advantages
The CEO Frontier Industrial by Artha Capital explains that buying industrial buildings offers competitive advantages such as:
1. Long-term capital gains for the asset in question.
2. Freedom to use the industrial building as financial leverage for business units.
3. Potential tax breaks that the operation may bring to the business.
4. Total control over the asset, no need to negotiate with developers or industrial park managers.
b) Disadvantages
1. High initial investment.
2. Initial taxes, obligations, notary expenses and liabilities implicit in the operation.
3. Maintenance costs fall solely on the company, which forces it to create a specialized unit or to hire an external supplier for this purpose.
Renting industrial buildings
a) Advantages
1. No huge initial investment which means more liquidity during the rental period.
2. Resource and time savings as permits and paperwork are the developer's responsibility.
3. Certainty in expenses such as maintenance, insurance and taxes if a Triple Net Contract is in place (this type of contracts are common for industrial property rentals).
4. Unexpected expenses, repairs and maintenance costs are passed on to the developer or park manager for the duration of the contract.
5. Flexibility to move to another facility once the contract is finished.
b) Disadvantages
1. No capital gains for the company.
2. Lack of freedom to adequate or renovate the property as required since it is managed by a third party.
3. Lack of freedom to adequate or renovate the property as required since it is managed by a third party.
4. Limitations for expansion or early release from the contract.
Source: Grupo Aeroportuario del Pacífico.
The type of industry defines location
In recent years, the increase in demand for industrial spaces has resulted in strong competition among regions, more so than states, to determine who wins the prize of the best industrial indicators.
Reports from specialized real estate consulting firms reveal that Guanajuato, San Luis Potosí, Querétaro, Jalisco, Nuevo León and Mexico City account for the highest number of sales for industrial land and industrial buildings, considering these are the states which have the strongest presence of automotive and aerospace industries as well as chemical and plastic industries.
States such as Baja California (Tijuana and Mexicali), Nuevo León (Monterrey and Metro Area), Jalisco (Guadalajara Metro Area), Chihuahua (Ciudad Juárez), Mexico City (Cuautitlán, Tultitlán and Tepotzotlán Logistics Corridor; Toluca and Mexico City) and the states of the Bajío region (Guanajuato, Querétaro, San Luis Potosí and Aguascalientes) accumulate -and will continue to so- the demand for industrial spaces, says Mr. Gutiérrez Tomassi.
He also mentions that for an industrial developer the ideal is to rent out a space for a ten year period, although the average rental period for the speculative market is five to seven years. On the other hand, build to suit projects have an average rental period of ten to twelve years, which is usually the time required to pay off the investment.
Patricio Gutiérrez Tommasi comments that due to increased demand, the average price for industrial spaces has gone up in the last few years. Zones are now divided into three categories: Productive areas where there is enough land and services are good, like the Bajío, where rental prices are between 4.50 USD/m² and 5.50 USD/m² Border zones (Tijuana, Monterrey and Juarez) where industrial spaces are in high demand and therefore rental prices range from 5.50 USD/m² up to 6.50 USD/m² and in some cases, like Tijuana this year, prices reach 7.50 USD/m². Zones with no available land for development, like Mexico City and surrounding areas, where rents start at 5.30 USD/m² up to $6.85 USD/m². Industrial spaces in Mexico City can go as high as 8.50 USD/m².
Mr. Gutiérrez Tomassi finalizes by saying that the Pandemic hit hard supply chains and has meant significant losses for productive sectors on a global scale. In the case of industrial real estate, the challenge has been growing at a faster pace to meet the demand of manufacturing companies that decided to come to Mexico to avoid further disruptions to their supply chains as well as distribution and ecommerce companies which have grown exponentially in recent times.
