12% of Office Buildings Have Vacant Spaces for Over 3 Years: How Does This Affect Demand and Profitability?

In Mexico, 12% of the Class A+, A, and B office inventory consists of buildings with spaces that have been vacant for more than three years, a condition known as structural vacancy.

Excluding these properties from the inventory, the office market demonstrates a more balanced supply and demand, with competitive prices leading to higher profit margins relative to inflation and shorter vacancy periods. This reflects a more dynamic and profitable environment for higher-quality properties, presenting optimistic investment opportunities.

Andre El-Mann Arazi leads FIBRA Uno, owner of Corporativo Cúspide, which has faced structural vacancy. Photo: SiiLA.

By: SiiLA News

09/10/2024

Mexico has approximately 11.5 million square meters of Class A+, A and B office space. Over the past three years, the average vacancy rate has been 21%, indicating a market where supply exceeds demand. This makes it difficult to lease spaces and puts downward pressure on rental prices, which, although they have risen in absolute terms, tend to lag behind inflation, resulting in a real loss of value.

However, when excluding buildings with structural vacancy—those that have had spaces vacant for more than three years due to factors such as obsolescence, poor location, legal issues, ineffective marketing strategies, or uncompetitive pricing—a stabilized market emerges, with occupancy rates exceeding 85%, reflecting stronger demand and better market conditions in higher-quality and more competitive segments.

According to data from SiiLA Market Analytics, 109 of the 874 buildings analyzed in the country’s leading real estate markets, representing 12% of Mexico’s gross leasable area (GLA), have spaces that have been vacant for over three years. When structural vacancy is excluded from the total inventory, the average vacancy rate over the past three years drops to 13.9%. The same trend is observed with data from the second quarter of 2024: when considering buildings with spaces vacant for more than three years, Mexico’s vacancy rate is 20.5%, but without them, it drops to 9.2%.

A similar pattern occurs with price variation. Over the last three years, rental prices have increased by 5.4% for the entire inventory but nearly 9% when excluding inventory that has been vacant for more than three years.

Implications and Recommendations

This year, the gap between highly competitive properties and those with structural vacancy is expected to widen.

SiiLA’s data on structural vacancy indicate that a significant portion of the market (12%) comprises properties that do not meet current tenant requirements. This suggests an increasingly selective demand in a context where the demand for quality spaces with competitive prices and strategic locations is vital.

The trends observed in the data confirm that while the overall market vacancy remains stable when properties with structural vacancy are included, excluding these properties reveals a clear downward trend in vacancy. This reinforces the fact that the competitive office market is experiencing moderate but consistent absorption, indicating a potential for growth and a strengthening demand in this segment.

On the other hand, rental prices, which have generally increased in recent years, reveal an interesting dynamic: while the rise continues for properties without structural vacancy, prices for those with it have declined over the last four quarters. This may indicate that less competitive properties struggle to maintain their prices in a market that favors quality and strategic location.

Finally, exposure time reflects divergent behavior: while it has increased for properties with structural vacancies, suggesting a stagnation in the absorption of these spaces, it shows a slight downward trend for properties without structural vacancies, indicating greater agility in the more competitive office market.

This year, the gap between competitive properties and those with structural vacancy is expected to deepen. However, the data suggests that having a quality property is not enough; the true competitive advantage lies in the ability to anticipate and adapt to emerging market trends. Investing in assets that can evolve with tenants’ changing needs and adjusting marketing strategies in real-time becomes imperative to maximize returns in an increasingly complex and competitive environment.

For more on trends and perspectives in Mexico’s commercial real estate market, explore SiiLA REsource or contact us at contacto@siila.com.mx.

Latam

Mexico

National

Office

Market Analytics

Other

ABOUT SiiLA

Founded in 2015, SiiLA is the industry leading REsource for comprehensive commercial real estate market insights, news and events across Latin America. The SiiLA suite of innovative products drive greater accuracy, efficiency, and strategic advantages for top players in the commercial real estate industry.