Events in the Mexican Real Estate Sector in Times of COVID-19By Jan Hogewoning | Wed, 09/09/2020 - 13:32
Q: Where did the idea of starting Gröuth Group come from and what added value do you offer?
A: This project was conceived well before the COVID-19 health crisis. I knew I wanted to concentrate on two spaces: real estate, where I had been operating for the past 30 years or so; and wellness, where I believe there is great potential to create value in the short to mid-term.
In spite of all the hardship brought by the pandemic, in a short period, in the wellness space we have been active in two private equity funds specialized in the Cannabis industry, one in the U.S. (Arcadian Capital) and one in Mexico (The Happy Capital Fund). We are investing ourselves and also attracting capital from Mexican nationals to boost investment in this industry that is countercyclical to COVID-19. We also created a wellness knowledge center for Latin America (Centro de Conocimiento Latinoamericano de Wellness) early April 2020 with the goal of allowing all its members to share their experiences of what is really transpiring daily during this crisis in the real estate, wellness and a range of economic sectors in Mexico and the region.
On the real estate side, we have also been very active and recently brought the BAMA construction company into Gröuth Group to gain construction capabilities. We created a brand-new residential brokerage company (Piña Asesores) from scratch, and are in the initial stages of co-developing a 100-unit affordable housing project in the historic center of Mexico City. This is a niche of real estate investment that is being supported by the local government and where we want to continue being active.
Q: In the area of real estate projects, what other opportunities do you see?
A: As a result of the COVID-19 lockdown period, one of the trends we are seeing is that people are getting out of congested urban centers at the moment, a move experienced not only in Mexico, but also in other large urban centers around the world. It is all about improving your quality of life (wellness) and maintaining your family as safe as possible at the same time, like a protective “bubble”. In our case, we are seeing that towns that are not too far from Mexico City, like Valle de Bravo, Tequisqiapan or Cuernavaca, and even Acapulco for Mexico City and Puerto Vallarta for Guadalajara have again become very popular escapes. Propelled also by the Work-from-Home (WFH) paradigm shift, these spots make a once-a-week commute back to the city not only possible, but also attractive. Demand for rental homes in these destinations has skyrocketed, while prices for rentals values have more than doubled in many instances. The case of Valle de Bravo, where my family along with many others have moved our residence recently, is attractive because there are many outdoor activities, the weather is great and the atmosphere has more of a Michoacan state feel than that of a town in the State of Mexico. Due to this surge in interest from city-dwellers, there is also a great demand for better schools, a local medical clinic and services. This situation shows that the pandemic also has bright spots and is not just gloom and doom.
Q: What do you expect will happen to the office rental segment over the coming months?
A: Right now, companies do not want to spend money; we are in a time filled with uncertainty. New leases are not happening and some of the ones that were in the pipeline are being delayed. As for the owners of the buildings, rent concessions depend on the tenant and the individual situation of the asset. While AAA buildings will provide little or no concessions, the ones with less favored locations or that were already suffering from a lack of reinvestment in the property by their owners, to keep them up to certain level of quality standards, will experience greater pressure to provide concessions to maintain their tenants. Let us not forget that landlords also have previous financial commitments to lenders, so they do not have a lot of room to maneuver. Having said this, I think it is far too early for companies to give up entirely on having an office. Gensler, one of the largest architecture and design companies, and a member of our wellness knowledge center, recently conducted a survey in the U.S. and found that on average two-thirds of employees want to go back to the office, a clear indicator that there is certainly a need and thus a future for the office. However, a majority of them do not expect the office they return to, to be the same one they left.
There is no doubt the market is going to be different. There are more than a 1 million square meters currently available in Mexico City, of a total inventory of 7 million square meters of AAA and A office space. As a result, many projects in the pipeline have been completely stalled, while the space available for subleasing has almost doubled, increasing the vacancy rate and providing even more area available for leasing. We estimate that it will take about 5 years for all current available inventory to be absorbed if the economic environment continues to deteriorate. Real estate is a cyclical business. Everybody builds at the same time and stops building at the same time. Due to the current pandemic scenario, there are some examples in other cities, where owners or developers reconfigured an office space and converted it into residences with dire results as the floor plan of each asset type is very different. This translated into poor quality spaces, some of them with no natural light, that provide poor security in the building and thus, where the wellness of the users is significantly reduced.
Q: How should offices be adapted to the new normal?
A: What will happen is that offices will be turned into places that incentivize socializing, where company culture is nurtured. We humans are social animals; we want to be and interact with our peers physically, not through a screen. We can make the virtual office option work if forced to do so, but it is seriously limited if you want to coach and bring on new employees into the company’s practices and culture. Many real estate agents are in the process of learning from their clients what they now want and more importantly, what they do not want.
There is no doubt that companies will be pressured to spend money to make their spaces both safe and attractive for their employees. For instance, we are starting to see a very strong demand for touchless technology in buildings and expect these technologies to become the norm in the coming years.
The biggest challenge remains vertical transportation (e.g. elevators). They represent a real challenge for building owners and operators, as, in order to minimize risk, elevators are only allowed to carry half or less of the occupants they can fit at a time, subsequently increasing the cue time that makes going to the office fast impossible.
Social distancing in the office itself will mean that about half of the employees will need to WFH in combination with a flex-office space solution. This pandemic presents a great opportunity, however, to step away from the very confined space that each employee had in offices when they left them. For instance, fifteen years ago, office space averaged 15 square meters per seating. Today, we were seeing numbers as low as 6 square meters in call centers. This is just unhealthy. “Open” spaces were not open anymore, and became very crowded. Now is a time to revisit those ratios and ideas to increase wellness.
Q: What can be expected in other real estate segments?
A: In the industrial real estate space, things are going fairly well. There has not been crazy growth, but things have remained steady. On average, owners have more than 90 percent of their portfolios under normal conditions and only about 10% of the cases where they have had to make some rent concessions. These are high-quality assets that are often dollar-based.
Retail spaces, on the other hand, are really struggling, some retailers were already in trouble before the pandemic due to the shift to e-commerce by consumers. Those that had not adapted have been forced to opt out of their physical stores or shut down entirely. Many retailers are closing down a percentage of stores, starting with those that were not making money even before the pandemic. The stores that do make money and are well positioned in good locations will be preserved. Then there is multifamily housing for rent, which is doing fine. People cannot stop paying their rent because they need a roof over their heads.
Lastly, hotels are struggling for sure with airline travel down and restrictions on the number of guests. Mexican tourism, however, will be back as it has proven before due to Mexico’s fortunate geography and many beautiful beaches, but it will take some time to recover.
Q: You are a founding member of the Latin American WELLNESS Knowledge Center. What is the objective of this center?
A: Early April, we brough together eight companies with different areas of expertise to form a group with the goal of assisting companies in their return to their workplaces once they decided to do so. We even created our own guide for our clients.
The group started gaining its own momentum and, in only five months, has now grown to almost 30 companies. We recently broadened the scope to focus on wellness and renamed it “The Latin American Wellness Knowledge Center” where we come together in weekly meetings to discuss the COVID-19 situation and what impact it is having on the country on different levels and in different sectors.
There is a great deal of information out there and it is in many cases conflicting to say the least. You cannot fully trust the news or even worse, in Mexico’s case, the government’s fairy tale accounts, so there is a need to produce timely and reliable information that can only come from the source itself. From “the soldier in the trench” if you will.
We have some really high-profile companies that are glad to share their experiences and lessons learned, not only in Mexico but in other regions of the world. A case-in-point is Grupo Posadas, the largest operator of hotels in Mexico, which recently declared bankruptcy to keep creditors at bay and remain afloat, while at the same time sharing its health protocols and the challenges faced in opening and operating hotels in this environment.
Another member is Laboratorio Médico del Chopo, which not only provides testing to thousands of people daily, but also has actuaries in charge of making accurate calculations using self-developed models regarding the actual COVID-19 contagion numbers in Mexico. We learned from El Chopo that their estimate is that the number of people who have actually contracted the virus or are currently infected is about 20 times higher than the official figure (among the G-20 countries, Mexico has the lowest testing percentage). This means that with 500,000 having officially been diagnosed, the real number stands at 10 million, and they estimate that a similar amount will be infected before we get over this pandemic. There is nowhere else to go to in order to get access to this valuable information.
Gröuth Group was founded in April 2020. Its goal is to assist individuals and companies in growing and achieving their potential in the areas of real estate and wellness.