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Analysis

Class a Commercial Real Estate in Demand

Wed, 01/21/2015 - 15:01

With refineries, factories, and plants being most commonly associated with the energy sector, it is sometimes easy to overlook the lesser considered office spaces that are used for necessary administrative and managerial tasks. According to CBRE, the world’s largest commercial real estate services company, Mexico is home to the largest Class A office market in Latin America, with approximately 4.5 million square meters of Class A and Class A+ spaces situated within the country. The Class A category represents a huge chunk of the overall market, which currently totals more than 8 million square meters across all types of office spaces. Pablo Yrizar, Vice President of CBRE, explains that the Mexican Real estate market is expected to see significant growth in the coming years, particularly in this already successful office space segment. “1.5 million square meters of Class A office space will be developed and delivered in Mexico by 2018, increasing the country’s existing inventory in this category by around 33%,” details Yrizar. “A great majority of these new developments will have forward-thinking infrastructure and technology, modern and efficient architectural designs, and environmentalfriendly certifications such as LEED (Leadership in Environmental and Efficiency Design).” When considering the changes that the recent reforms will bring and what entering companies will require from their new real estate investments, this should come as welcome news to the oil and gas sector.

Mexico is expected to be a strategic target for the most important energy companies in the world. Once they arrive, the real estate market will experience a direct impact from this paradigm shift. According to expert estimations, the reforms could generate US$1.2 trillion in economic activity and 2.5 million jobs over the next decade. Yrizar explains how this massive potential growth has generated an increase in potential office requirements from energy companies. “In 2014, companies operating within this sector only accounted for 5% of the total demand for Class A and A+ office space in Mexico City, but with the recent reforms, this has increased to more than 13%. By 2016, we expect that to reach around 18%.” The office market in Mexico is mainly concentrated in Mexico City, which has more than 80% of the country’s total inventory; Monterrey, Guadalajara, and Queretaro collectively pick up most of the remaining 20%.

CBRE focuses most of its efforts within the capital. “In terms of rental rates, Mexico City is still an inexpensive office market in comparison to major international hubs, even when comparing it against other Latin American cities,” states Yrizar. “The reforms will allow new markets to face growth and expansion, particularly in cities such as Villahermosa, Tuxpan, Ciudad del Carmen, Campeche, and Merida, among others.” Until now, the demand in these areas came mainly from government entities. Cities like Ciudad del Carmen or Coatzacoalcos have consolidated up to 90% of their GDP in the energy industry. However, public infrastructure in these towns is not yet aligned with international standards, and the development of offices and industrial facilities is still controlled by local developers. As a result, the price to quality ratio in these locations is not very favorable for tenants. Despite this lag, CBRE is confident that Mexico is a land of opportunity for those who wish to stake their claim in the blossoming office space market.

In recent years, the professionalization and institutionalization of the Mexican real estate market has allowed global firms such as CBRE to consolidate and expand their operations within the market. CBRE recently reached overall dominance in the office, industrial, retail, and real estate investment markets in Mexico. In 2014, nearly 50% of the most relevant broker-executed private transactions in primary markets in the country were implemented by this American firm. In order to further cement its position, CBRE has assembled market leaders in each product type and real estate specialty under one roof. This has made it the only firm to have a specialized team of real estate experts to assist oil and energy corporations, thereby giving its clients the best available synergy of resources for solving their real estate needs. With coverage in over 17 Mexican states, CBRE provides knowledge, experience, and resources to investors, developers, owners, and tenants, as well as companies of all sizes. As a full service consultant, it can offer office and industrial brokerage, real estate corporate services, workplace strategies, facility and project management, appraisal and valuation, development services, and investment management, among other specialties. “Flexibility is the name of the game for corporate users in the energy industry, particularly those looking to rent office space,” states Yrizar. “This is because, in most cases, it is difficult to forecast how many employees energy companies will have in the future. This pliability can be achieved with several techniques, such as the right to early termination without penalties, guaranteed expansion options, contracting options, first right of refusal for office space, the right to sublease, assignment right, or an antidevaluation clause.” This knowledge and expertise is more evidence that CBRE is primed and ready to continue on its path to further success in Mexico.