Digital Sales Channels Boost Demand for Distribution CentersThu, 11/01/2018 - 14:36
Q: How has the growth of e-commerce impacted the industrial and logistics real estate segments in Mexico?
A: Mexico has fallen slightly behind in the development of e-commerce compared to countries such as the US. E-commerce accounts for around 3 percent of sales in Mexico while in the US this figure amounts to around 12 percent, so there is still space for development. The arrival of Amazon to Mexico boosted e-commerce in the country as companies started to compete in the area to retain market share. The ways in which people purchase goods are changing and these companies are addressing this change. They are improving their processes to increase their participation in the e-commerce market. This boosts demand for logistics real estate as companies change their supply chain strategies. Around 40 percent of the demand for space in Mexico City is oriented directly to e-commerce and 3PL operators in Mexico are expanding their activities, so Prologis expects solid demand in that segment in 2018.
Q: What advantages have prompted e-commerce companies such as Amazon to trust Prologis with their distribution centers in Mexico?
A: Demand in e-commerce is different from demand in other segments. We have several global clients that engage in e-commerce so we are aware of how this sector has developed and its needs. One of Prologis’s competitive advantages in the e-commerce segment is its global reach. Amazon is our most important client globally. Prologis works with this company in 19 countries. We delivered a 100,000m2-building for Amazon in May 2018 – Amazon’s first distribution center of that size in Mexico. Prologis is building a similar distribution center for Latin American e-commerce giant MercadoLibre.
These developments are probably the only two buildings of this size in Mexico’s industrial real estate segment. Fibra Prologis planned them well in advance and purchased the spaces because we predicted that trends such as e-commerce would gain importance. There is no other real estate developer that has enough land to house a 100,000m2 building. Fibra Prologis supports other clients with e-commerce operations, such as Palacio de Hierro, Liverpool and DHL. These companies already operate from our distribution centers. We understand the requirements these companies have, such as the need for higher ceilings and special features specific to trucks.
Q: What logistical challenges do e-commerce companies need to overcome to more effectively reach customers?
A: Demand for “last touch,” last-mile delivery services offers a distribution challenge. Companies are looking for ways to place distribution centers closer to consumers to offer more agile deliveries to central areas such as the Condesa neighborhood in Mexico City. Proximity to clients enables companies to deliver products within hours of them being purchased online. To cater to this segment, Prologis is already developing vertical distribution centers in the US as rents increase in central areas. We expect this process will also take place in Mexico City and we plan to replicate those processes locally. New distribution schemes offer opportunities in the short term.
Q: How do you expect Mexico’s industrial real estate market to perform in 2018 compared to other segments?
A: There was a great deal of uncertainty related to NAFTA and the 2018 presidential elections and nobody knew how the real estate market would perform in 2018. While uncertainty can lead investors to postpone investment decisions, markets have behaved more or less the same as in 2017. Growth in consumer sales has decreased slightly but demand for distribution centers is still highly dynamic. While the industrial real estate sector has experienced demand increases, the office buildings segment has lagged behind due to an oversupply that harms rents. Office buildings also have a long construction process that lasts around four years while industrial real estate only takes nine months once the land has been acquired. An oversupply in the industrial sector is rare.
Q: How is demand for industrial space oriented to the manufacturing industry different across Mexico?
A: Markets oriented to the manufacturing industry remain healthy. Several firms plan to continue expanding in Monterrey and several cities on the border with the US, such as Tijuana and Ciudad Juarez, are dynamic. On the other hand, demand in Guadalajara has fallen because companies in this area tend to have a more locally-oriented profile and have suffered a greater impact from the presidential elections. Now that the elections are over, the market is starting to regain momentum in Guadalajara.
Q: How will the results of the federal elections and the US-Mexico-Canada trade deal impact the development of transportation and logistics infrastructure?
A: I expect that President-elect López Obrador will place consumption at the center of his economic policy proposal and provide continuity to trade with the US and Canada. Fibra Prologis is optimistic about this process as infrastructure is one of the pillars of the new government’s economic plans. López Obrador has won solid consumer trust and the support of the Mexican population, which should boost both the real estate market and the country’s economy in general. Regardless of his economic plans, we expect that local supply chains will continue to reconfigure as people change their consumption habits and Fibra Prologis will capitalize on this change. The new trade deal will have a positive effect not only on Fibra Prologis’s business but on Mexico’s economy in general. I expect that the Mexican manufacturing industry will remain an attractive sector. Very few companies’ expansion plans have been affected by NAFTA-related uncertainty and this trend should continue through 2019. Having said that, there is a risk that interest rates will go higher in Mexico, which could push investments toward more developed markets with lower interest rates such as the US.
Q: What are the main challenges that Fibra Prologis has encountered when looking for and purchasing large plots of land in Mexico City?
A: The Valley of Mexico is one of the most dynamic markets worldwide. About half of Fibra Prologis’ investments plans are focused on this state because it is a dynamic market that we know. Mexico City has an annual land vacancy rate of 2 percent, which is minimal. There may be demand for 840,000m2 in 2018 in this region but there is not enough land to satisfy this demand, which increases land prices. It is also difficult to acquire land here because many spaces are ejido-owned. This means it is necessary to try to get dozens of owners on the same page to purchase a plot of land in this region, which can be risky as one or two landowners who are not on board can effectively bring down a project. These challenges reduce the number of players oriented to this market.