The Mexican industrial market has undergone significant changes over the past decade, particularly in the capitalization rate (cap rate) and the associated risk perception of these assets. The cap rate, calculated as the net operating income (NOI) divided by the property value, is essential for evaluating the profitability and viability of real estate investments.

According to Alejandro Delgado, Country Manager Mexico at SiiLA, cap rates in Mexico have shown a downward trend since 2010, dropping from around 12% to approximately 7.8% today. This decrease reflects not just greater confidence, but also the stability of the Mexican industrial market. The 2020 pandemic accentuated this trend, widening the cap rate ranges due to economic uncertainty, but the average continued to decline, indicating a stabilization in risk perception.

In simple terms, the cap rate is an indicator that reflects the time it will take to recover your investment, the periodic cash flow you will receive, and the risk associated with the investment.

Generally, a lower cap rate indicates lower risk and a more stable market. This is because the reduction in the cap rate is related to the property appreciation over time and favorable market conditions, such as high demand, competition, tenant quality, and property location, which extend the investment's return period. Conversely, a higher cap rate suggests higher risk and lower property valuation, albeit with higher annual returns, as investors expect greater profits to compensate for perceived risk.

It is important to note that there is no "good" or "bad" cap rate. This indicator expresses the income as a percentage of the property's value, reflecting risk perceptions and the urgency of investment return. Therefore, the rise or fall of the cap rate shows the degree of investor confidence in a particular market and their willingness to take risks based on economic conditions and specific property attributes.

Factors Behind the Cap Rate

To fully understand the cap rate evolution following the pandemic, it is crucial to consider several elements that directly influence this indicator. Factors such as industrial space vacancies, construction costs, and land value not only affect prices and property profitability but also influence risk perception and, consequently, the cap rate. Analyzing these elements helps us understand why and how the cap rate has changed in the Mexican industrial market.

During a presentation to the Federation of Colleges of Valuers (FECOVAL), Alejandro Delgado mentioned that the decline in vacancy rates has been a critical factor in reducing the cap rate.

"In 2019, the vacancy rate was above 5%, but it decreased significantly in mid-2021, reaching historic lows. This reduction was due to an oversupply of industrial spaces, driven by the arrival of companies, especially from Asia, that quickly occupied the vacated spaces. According to the law of supply and demand, this lower vacancy led to an increase in prices per square meter, which went from $4.50 per month to over $7.00 between 2019 and 2023," he noted.

In addition to the reduction in vacancies, which has trended downward over the last five years and generated greater competition for available spaces, the increase in construction costs, driven by rising steel and concrete prices, and the rise in land value due to a lack of supply with appropriate zoning and infrastructure, particularly in Ciudad Juárez and Monterrey, have influenced the increase in industrial market prices.

"The increase in demand and the rise in prices are factors that anticipate safer and more stable returns, translating into lower cap rates," noted the SiiLA executive. "This behavior underscores confidence in the resilience of the Mexican industrial market and its ability to maintain constant asset appreciation," he added.

One situation that generates the most confidence in the Mexican industrial markets and is related to the reduction in vacancy is the upward trend in gross and net absorption rates, indicating sustained demand and solid occupancy of spaces despite the growing delivery of new inventory.

"Gross absorption, which measures the square meters rented over a period, has consistently increased, reaching a record in 2023. However, the new inventory of industrial spaces has grown slower, keeping vacancy low and continuing to push prices upward," Alejandro explained.

During his presentation, the business specialist with extensive experience in real estate asset valuation, investment analysis, market research, and business entrepreneurship highlighted that the Mexican industrial market is attractive to a diversified portfolio of companies, especially those in the automotive, transportation, logistics, and consumer goods sectors.

"Nearshoring has played a crucial role in this dynamic, attracting companies from around the world to establish themselves in Mexico to take advantage of its proximity to the United States," he concluded.

For more information on the industrial market's performance and development, explore SiiLA REsource or email us at contacto@siila.com.mx.