The Impact of Industrial Demand. In Three Years, Market Prices Increased by 49.7% on the MX-US Border

In the border areas of Mexico with the United States, the industrial real estate sector is experiencing a notable boom, with a 49.7% increase in the prices of industrial buildings between 2020 and 2023. This growth, driven by economic dynamism, cross-border trade, and the relocation of supply chains, generates attractive investment opportunities, with returns exceeding inflation costs.

Sergio Arguelles Gonzalez is the President and CEO of FINSA, an industrial developer with a comprehensive presence on the border between Mexico and the United States. Photo: SiiLA.

By: SiiLA News

02/28/2024

Market prices are crucial for evaluating investment profitability. Significant increases in these prices can indicate growth and expansion opportunities for investors. An example is the border areas of Mexico with the United States, where the average costs of industrial buildings experienced an increase of 49.7% between 2020 and 2023. This increase significantly exceeded the general inflation in these regions, which averaged 21.7%, according to data from SiiLA and the National Institute of Statistics, Geography, and Informatics (INEGI).

The rise in market prices above the inflationary increase has significant implications for the industrial real estate sector and its profit margins. Firstly, it indicates that the demand for industrial buildings in the border areas of Mexico with the United States is high, possibly due to economic growth, increased cross-border trade, or the relocation of supply chains. Secondly, it suggests that investors in the industrial real estate sector are obtaining returns above the inflation rate, increasing the attractiveness of these investments. Finally, the behavior of the industrial real estate sector reflects a healthy and expanding market dynamic, with profitable investment opportunities for those looking to capitalize on the growth of this area.

This upward trend in market prices is still evident in the main border industrial markets. By the end of 2023, the average price in Ciudad Juarez, Mexicali, Monterrey, Saltillo, and Tijuana was around 6.5 dollars per square meter, exceeding the national average of 4.9 dollars per square meter. In the last year alone, Monterrey was the border region with the highest increase (+31%) in market prices, followed by Saltillo (+11%), Mexicali (+9%), Tijuana (+8%), and Ciudad Juarez (+1%). In the same period, the regional average inflation was 3.8%.

Returns and Financing

Evolution of general inflation and market prices for industrial assets in border regions of Mexico. Graph: SiiLA.

Regarding returns for investors, it is essential to highlight that the price increase in the border industrial real estate sector has a margin over the loss of purchasing power due to inflation. This means that, despite increasing construction and acquisition costs, investments in this sector still offer a positive real return. The ability to generate rental income and the appreciation of properties remain key factors in ensuring attractive returns.

Although the figures reflect the attractiveness of the industrial real estate sector in these regions and the underlying economic dynamics driving demand and prices, such as proximity to the world's most important consumer market and macroeconomic stability in Mexico, it is important to consider that the upward trend in market prices can also pose challenges, such as an increase in the cost of capital, affecting the viability of new projects and the expansion of existing operations, especially considering that these are regions with more demand than supply of spaces, limited land accessibility, and average vacancy rates below 2%. On the other hand, the appreciation of properties can result in a revaluation of assets on company balance sheets, which could positively impact their market valuation.

Faced with the escalation of prices in the border industrial real estate market, it is imperative to recalibrate asset management under a more analytical and prospective prism. This revaluation of assets requires a financial strategy focused on maximizing income and preserving and increasing long-term value. Property owners and asset managers should consider refinancing as a strategic tool to release capital at more favorable rates and reinvest in property improvements and green technologies that can increase the efficiency and attractiveness of their industrial spaces. Simultaneously, portfolio diversification emerges as an indispensable strategy to mitigate risks associated with market volatility and economic fluctuations.

For more information on commercial real estate market trends, explore SiiLA REsource or contact us at contacto@siila.com.mx.

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