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Analysis

E-Commerce Sparks Hope Among Industrial Developers

Wed, 11/01/2017 - 15:38

With the growth of its manufacturing industry after NAFTA, Mexican industry became extremely reliant on the country’s relationship with the US. But since the election of Donald Trump threw a spanner in the works, how will the renegotiation of the treaty impact the performance of the industrial real estate sector in Mexico?

According to CEPAL, FDI in Mexico decreased 7.9 percent from US$34.8 million to US$32.1 million from 2015 to 2016, but Mexico continues to be the second Latin American country with the most FDI after Brazil. The first round of NAFTA renegotiations caused relatively little movement in the country’s industrial sector, and although there is still uncertainty in the air, investors and developers are still betting on the Mexican market. “In the months following the election we have already witnessed the checks and balances in the US working as they should, which has restored a lot of investor confidence in Mexico,” says Juan Torres Landa, Partner at Hogan Lovells.

But these circumstances have made the industrial sector more cautious and as a result, occupancy rates dropped in comparison to 2015. According to CBRE’s 1H17 Industrial Marketview Report, the net absorption was over 20.7 million ft2, with the highest absorption rates in the Bajio region. But Cushman and Wakefield recorded a decrease from 5.4 percent to 4.5 percent in vacancy rates and average prices for Class A properties dropped from US$5.69 to US$5.05 per ft2 from 2Q16 to 2Q17. Fluctuation in exchange rates and speculation in the market had an impact on the performance of the sector, with national construction decreasing 3 percent from 2Q16 to 26.9 million ft2 from 27.7 million ft2.

DEVELOPERS LOOK TO NEW HORIZONS

Despite the numbers, industrial developers and Fibras are beginning to look to e-commerce to pick up the sector’s slack in the next few years. With wary automotive and manufacturing investors, e-commerce is expected to increase the demand for warehouses and other logistics real estate. In the last six years, e-commerce has grown more than 400 percent in Mexico, instilling developers with even more hope. From 2013 to 2014, e-commerce in Mexico grew 34 percent from US$9.2 billion to US$12.2 billion; from 2015-2016, the industry grew another 25 percent to value US$16.22 billion, according to the Mexican Internet Association (AMPICI). This trend is seen continuing in the coming years.

The big players leading the demand, according to Credit Suisse, are Walmart Mexico, Privalia, Linio and Amazon, which will be investing substantially in Mexico through 2017. “The US leader, Amazon, recently established operations in Mexico and has launched its Prime program that guarantees one-day delivery,” says Luis Gutiérrez, Director General of industrial giant Fibra Prologis. “This encourages other e-commerce companies to upgrade their platforms to compete with the service offered by Amazon. For us, this means there will be a greater demand for more logistics space and the traditional warehouse is changing as a result.” Stores such as Liverpool and Palacio de Hierro must increase their online presence and their logistics capacities to keep up with competitors such as Forever21 and even Walmart.

AMPICI data show that Mexico’s largest urban centers are those that embrace this trend the most. Mexico City leads the race. Amazon announced in 2017 that it would be opening a 92 million m2 warehouse on the outskirts of Mexico City. It has two distribution centers located in Cuautitlan Izcalli in the State of Mexico with a total capacity of 46,452m2, both developed by Fibra Prologis. “Companies are following this trend and retail spaces are becoming more compact with warehouses placed strategically around cities to cash in on e-commerce,” says Victor Lachica, President and CEO of Mexico and Central America of Cushman & Wakefield.

RETAILERS FIGHTING BACK

Commercial real estate developers now have to up their game to secure their multimillion-dollar investments in hundreds of malls throughout the country. “E-commerce is fulfilling a purchasing need, rather than a human need, and we need to anticipate this and provide what e-commerce lacks and what new generations are demanding,” says Jimmy Arakanji, Co- founder and Co-CEO of commercial developer Thor Urbana.

The entrance of e-commerce will help diversify the country’s real estate industry and push the standards of developers to ensure quality infrastructure that meet the demand of tenants in the years to come. But industrial developers are sure to be the winner in the e-commerce race. “In the Amazon era of increased e-commerce, we find it more dynamic to be present in distribution,” says Roberto Ordorica, Director General of ALIGNMEX. “I would rather own Liverpool’s distribution center rather than build a shopping center with Liverpool as a tenant.”