Mexican Office Market, a Risky Yet Profitable Game

Q: In such a competitive market, what differentiates Avison Young from other real estate service firms in Mexico?
A: The main characteristic that differentiates us from our competitors is that we are not a public company but rather a collaborative partnership. We believe that under this scheme we are able to better serve our clients since Commercial Real Estate (CRE) transactions are not necessarily aligned with quarterly reports. This allows us to have better alignment with our clients’ interests. We are a global CRE services company with 84 offices in North America and Europe. Our 2x5x5 service model implies that we serve two types of clients: users/occupiers and owners/investors. These clients are linked to five asset types: office, industrial, retail, multi-family and hotel. They provide five services: tenant/landlord representation, property and facility management, capital markets, project management and appraisals and advisory services.
Q: What is Avison Young’s relationship with Canadian pension funds and what role do they play in its growth strategy?
A: In July of this year, one of the top institutional investors from Canada, CDPQ decided to invest CA$250 million in Avison Young. We will use the proceeds to invest in acquisitions and the recruitment of key professionals to fuel our ongoing growth and global footprint as well as our service-line capabilities. With almost CA$300 billion in net assets, CDPQ’s global portfolio of investments spans across various markets and sectors, including private equity, infrastructure and real estate. In the latter, for instance, CDPQ owns Ivanhoe Cambridge, which in Mexico owns 50 percent of MIRA through which it invests in large, mixed-use urban developments. We are looking forward to collaborating with this and other CDPQ owned companies in Mexico.
Q: Is there an unhealthy vacancy rate in Mexico City and what is your forecast for the next year in terms of office spaces?
A: The office market has been growing rapidly in the last few years. However, when comparing the size of Mexico City’s 6.2 million m2 Class A and A+ inventory to that of US and Canadian cities, it is still actually a mid-size city in the same leagues as Columbus, Ohio, in spite of being by far the largest office market in Latin America. Having said this, in terms of ongoing new construction, Mexico City has more than 1 million m2, more than larger international office markets such as Chicago.
We expect the inventory to surpass the 7 million m2 ceiling in the next 24 months and thus, for the vacancy rate in some sub-markets in the metro area to start becoming a concern. The desirable average vacancy rate is between 10 to 15 percent and although Mexico’s current average is just above 15 percent, if it starts to elevate, markets develop a surplus of product. If this growth pace continues and assuming the same 300,000-400,000m2 on average are absorbed annually, vacancy rates will go up, which will in turn lower lease prices and subsequently asset values will also follow. For example, the Polanco, Reforma and Insurgentes corridors are today healthy but there is a great amount of new construction of more than 500,000m2 in these three markets alone.
Additionally, developers and landlords will face some new and increasing challenges in the next few months with the change in the federal and local governments. At the federal level, the final signature on a revised NAFTA affects the exchange rate. A majority of the leases in Class A and A+ offices are dollar-denominated, which deters companies from signing new leases. At the local level, the entering government has agreed with the still incumbent city authorities to stop the granting of new construction permits on mid to large size developments. This is troublesome to say the least for developers pushing new projects, albeit if this trend continues, existing buildings and those already under construction would stand to benefit since the impasse would create greater demand for existing and upcoming office inventory.