The Impact of Unemployment on Mexico's Office Market: Lessons from the Pandemic

Unemployment is an indicator used to assess the economic performance of a country or region, which is closely related to the evolution of various productive sectors, including the commercial real estate market. It's no secret that companies can face difficulties in expanding or maintaining their operations during a decrease in economic activity. In such situations, job losses and cost reductions, such as office space rentals, become common measures for companies seeking to maintain their financial viability.

Under this logic, unemployment can lead to an excess supply in the commercial real estate market as companies lay off employees, downsize, or close entirely. This can result in lower demand for office spaces, leading to a shift towards more affordable, smaller, and/or lower-quality spaces. Consequently, commercial property owners are pressured to reduce or contain rental prices and offer incentives to attract tenants. Moreover, the lack of employment can adversely affect people's ability to afford rent, contributing to increased availability and higher competition in the commercial real estate market. A relevant example of this occurred during the pandemic in Mexico, as indicated by data from INEGI and SiiLA. 

In the second quarter of 2020, the coronavirus pandemic affected Mexico's labor force, leading to an unprecedented economic recession. The national unemployment rate increased by 37% between March and June 2020, reaching 4.7% of the labor force, according to INEGI data. With the loss of over 300,000 jobs, lack of investment, lockdown measures, and limited social mobility, many companies were forced to close their offices and implement remote work. This directly impacted the vacancy of office spaces, which increased nationwide. Consequently, as unemployment surged in 2020, the office vacancy rate in Mexico's major cities increased from 13.3% in the first quarter to 15.5% in the fourth quarter of that year.

However, starting in 2021, employment gradually began to recover, and companies partially resumed their operations while embracing remote work. Despite the relative economic recovery, it was in the second quarter of 2022 that employment reached pre-pandemic levels, with an unemployment rate of 3.3%.

Regardless of the improvement in employment, the economic recovery took time to reflect in the real estate sector as uncertainty and caution persisted in the markets, and companies were not seeking rapid expansion. Thus, during 2021 and 2022, there was a 25% increase in office vacancy rates, ending 2022 at 22%, according to SiiLA Market Analytics. However, starting in the third quarter of 2022, the situation improved for the office sector in Mexico. Confinement measures were left behind, social mobility was restored, and investments gained momentum. As a result, INEGI and SiiLA data indicate that from that quarter until the first quarter of 2023, the unemployment rate decreased by 16%, reaching pre-pandemic levels, while office vacancy rates declined to 21.7%, the highest level in the past five quarters.

It's important to note that the economic landscape continues to evolve, and the relationship between employment and office vacancy in Mexico may continue to change in the coming months. However, the most recent data suggests a positive trend with decreased unemployment and increased office occupancy, driven by alternative business models such as coworking. This encourages the country's economy and the real estate sector's recovery. To learn more about this and other topics, visit REsource or contact us at contacto@siila.com.mx.