According to information provided by Market Analytics, a product developed by SiiLA, over 3 million square meters of industrial assets have been delivered in the markets of Mexico City and Monterrey since the end of the third quarter of 2019. Despite the higher construction costs due to the surge in steel prices from mid-2020 onwards, the pace of deliveries remained steady in 2020 and 2021.

Marcos Casarin, Chief Economist for Latin America at Oxford Economics, explains in an interview with El Universal that the increase in steel prices has been primarily driven by four factors: raw material shortages, high demand from China, record international steel demand, and the global inflationary increase we are experiencing.

Through a survey conducted by SiiLA among different platform users, it was found that steel represents between 30% and 40% of construction costs for a property, depending on the construction model (Tilt-up, Concrete, Block, or Metal Sheet). Therefore, the effect of this price hike was immediately reflected in the industry.

Who bears the brunt of this situation?

I conducted an in-depth investigation to understand what has happened to industrial space rental prices and who ends up paying the surcharge caused by this effect: whether it's the developer, sacrificing part of their return on investment, or the end-user (tenant), experiencing an increase in rent.

To conduct a better analysis, we separated the market prices of first-generation assets, or new deliveries, from second-generation assets. We focused on the markets of Mexico City and Monterrey, as they lead in new deliveries and absorption.

Since the second quarter of 2020, we have observed a significant increase in market prices for first-generation warehouses, showing a difference of over 60 cents compared to the rest of the market. This coincided with the increase in global steel futures prices.

It's important to note that we have witnessed record periods of gross absorption (demand) for industrial assets in recent quarters, which could explain the rental price increase. In fact, in the last four quarters, Mexico City and Monterrey have experienced above-average absorption compared to the previous ten quarters.

In conclusion, based on the detailed information accessed through SiiLA, we can affirm that there is a direct effect on market prices, particularly for newly incorporated warehouses built during the period of increased construction costs and global inflation. Additionally, the industrial sector is experiencing record absorption in most markets.

These factors impact not only rental prices but also the value of properties, replacement costs, and income-based valuation. In an upcoming article, I will address the question of cap rates: Are we approaching a "bottom" in industrial asset pricing? Let's see what the data reveals and what other trends are occurring.