Industrial Supply and Demand in Mexico: What Does It Mean That New Warehouses Are Larger Than Absorbed Spaces?

The gap between the size of industrial spaces demanded and those offered in the Mexican market has narrowed by 11.1% annually over the past five years. This significant reduction indicates a more balanced market, where supply is increasingly meeting demand. According to SiiLA data, absorbed properties are, on average, 31% smaller than new additions to the market, further highlighting this trend.

This adjustment in the Mexican industrial market reflects a maturing process where supply increasingly aligns with demand. However, challenges such as land scarcity and growing regulatory complexity persist.

Andrés Benavides leads Daikin Mexico, which absorbed over 74,000 sqm in the Millennium Industrial Park in San Luis Potosí during Q2 2024. Photo: SiiLA.

By: SiiLA News

08/26/2024

In the Mexican industrial market, newly added properties have generally been larger than what companies actually need. However, this gap has been steadily closing over the past five years, with an average annual reduction of 11.1%. For instance, while absorbed properties in 2020 were 49% smaller than new additions, that difference has decreased to 31% so far in 2024, according to SiiLA data.

This positive trend indicates a gradual adjustment between what developers build and what companies genuinely need, providing reassurance about the market's adaptability.

If the market offers a larger space than the average demand at a competitive price per square meter, companies can benefit from the additional space for future expansion. However, this may impact the owner's profitability, who could capitalize more by adjusting the price in line with the scarcity of available land for larger buildings or by optimizing the space by making it flexible for multiple tenants. On the other hand, when offered spaces are smaller than required, companies may choose to refrain from leasing, increasing the risk of prolonged vacancies. Alternatively, the need to lower prices to close deals can erode the asset's profitability.

It's worth noting that beyond location and market conditions in each region—such as the availability of industrial land, zoning rules, and construction costs—the property class influences the size of the gap between supply and demand.

Class A buildings tend to be larger than lower-class buildings, so the gap between what is demanded and what is offered (-25% in 2024) is usually smaller than in Class B buildings (-35% in 2024). Additionally, over the past five years, the average reduction of this gap has been more pronounced in Class A buildings (-9% annually) compared to Class B buildings (-1% annually). This suggests that Class A buildings better align with market needs, adapting more quickly to space demands.

Supply and Demand by Region

The FINSA Santa Catarina 14 warehouse, with nearly 48,000 sqm occupied by Carrier, is one of the largest deliveries of the year. Photo: Carrier.

In northern Mexico and the Bajío region, the size difference between absorbed properties and new inventory is greater than in central Mexico. According to data from the first half of 2024 by SiiLA Market Analytics, in the metropolitan area of the Valley of Mexico, the properties demanded are 26% smaller than those offered. In contrast, excluding exceptional cases like Monterrey, Saltillo, and San Luis Potosí, the difference in the north and Bajío is approximately 33%.

Notably, this difference is minimal in Monterrey, at just -5%, well below the trend in the north and the rest of the country. This is related to the regional companies' profile, where the demand for custom-built warehouses exceeds the national average size.

In contrast, Saltillo and San Luis Potosí show a dynamic opposite to the national trend. In these regions, absorbed warehouses tend to be larger than those added to the market during the year's first half. In Saltillo, which resembles Monterrey as the third market with the largest warehouses in the country, the difference is minimal (1%). In San Luis Potosí, the properties demanded were up to 15% larger than the new inventory, placing it among Mexico's top five regions with the largest average warehouse sizes.

Despite the growing trend toward larger industrial spaces, driven by expanding demand in manufacturing and logistics sectors, the market shows signs of maturing by adjusting supply to the specific needs of each region and property class. This adjustment is crucial in an environment where operational efficiency and space optimization are as valued as size, especially in last-mile areas.

However, the real revelation is not just that the gap between supply and demand is closing, but that it is doing so in a market that is diversifying and becoming increasingly specialized. Nevertheless, this path to optimization is challenging. Developers face growing land scarcity and an increasingly complex regulatory environment, which may limit their ability to respond quickly to changing market demands. Moreover, the risk of oversupply in certain areas, particularly in markets that have not yet reached a clear equilibrium, could pressure asset profitability in the medium term.

In this context, the challenge will be to build more or larger spaces strategically and adaptively. As the key players, developers will need to focus on creating flexible spaces that can adjust to changing market needs and identify areas where actual demand justifies new investments. The ability to anticipate trends and carefully balance supply with demand will be crucial to maintaining profitability and ensuring long-term success. Ultimately, the key will be to build with vision, not just volume.

To learn more about Mexican industrial real estate market trends, explore SiiLA REsource or contact us at contacto@siila.com.mx.

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