Tenant Confidence Rises, But Retail Construction in Mexico Lags

Despite the uptick in consumer and tenant confidence, the construction of new retail projects in Mexico continues to lag, still grappling with the aftermath of the COVID-19 pandemic. This sluggish pace is hindering the expansion prospects for several commercial brands. 

According to CBRE, a real estate services firm, only 250,000 m2 of retail space was delivered in 2023, which accounts for less than 1% of the total national inventory. Luis Llaca, vice president, CBRE Retail Latin America, described this figure as “ridiculous”, especially considering Mexico's vast mall inventory exceeding 26 million m2. "The demand for retail spaces is high. Many commercial brands struggle to find suitable locations to open new stores," Llaca said.

Gabriel Ramírez, CFO, FibraShop, a Real Estate Investment Trust (REIT), pointed out that apart from the pandemic and lockdowns, rising interest rates in recent years have also impacted the retail real estate sector. He noted that the revival of commercial projects largely hinges on a potential decrease in interest rates in 2024, which could facilitate developers' access to credit and bolster profitability.

CBRE forecasts the construction of at least 10 retail projects in 2024, with an average leasable space of 25,000 m2, se to be completed by 2025. The gap between demand and supply has led to an escalation in rental prices, with some malls in Mexico City witnessing a 30% annual increase in costs in 2023.

Ramírez from FibraShop highlighted the resurgence in mall attendance, evident from the surge in parking revenues. He noted that quarterly parking revenues across their portfolio nearly doubled from MX$30 million (US$1.75 million) to nearly MX$57 million since before the pandemic. 

The influx of companies relocating to Mexico amid global supply chain adjustments has also contributed to increased mall foot traffic. While this has not translated into new construction projects, it has fueled the expansion of strategically positioned malls. FibraShop plans to invest approximately MX$300 million over the next three years to bolster growth within their existing properties. Ramírez explained that the preference for locations near industrial developments in the north or the Bajio region has prompted them to create mini-developments within their current mall setups.