Post-Pandemic Caution Cuts Office Lease Terms to 4 Years in Mexico

According to SiiLA, tenants who tend to sign the longest-term contracts are those from the governmental sector (five years), public services (4.5 years), consumer products (4.3 years), health sciences, and TAMI (4.2 years, respectively). In contrast, companies in agriculture and manufacturing (3.8 years in each case), business products & services, as well as oil & gas (3.7 years, respectively), and hospitality & tourism (3.5 years) tend to sign shorter-term contracts. However, there are exceptional cases like the Universidad UNIVER, which in 2022 celebrated a 15-year lease contract with FIBRA Educa to occupy a property of almost 5,500 square meters in Tlaquepaque, Jalisco.

Although the duration of contracts can vary by up to 43% between the sectors with the longest and shortest validity period, the standard deviation between different sectors suggests a diversification in the perception of risk and the long-term planning strategy of each industry. This variability in contract duration reflects the needs and expectations of each sector and the ability of companies to adjust the time of their lease contracts according to their growth expectations, economic stability, and the dynamics of the real estate market. This is a critical factor for effective risk management and the optimization of their operations.

The data also indicate that the variability is primarily related to the quality and location of the leased properties.

On the one hand, there is moderate confidence in the economic stability and regional growth potential, especially in Mexico City, where the average validity of lease contracts exceeds 4.1 years. Other markets, such as Guadalajara and Monterrey, have similar contractual durations, with averages of 3.9 and 3.5 years, respectively, while Queretaro averaged 3.2 years. These figures highlight the preference for medium-term contracts at the national level and reflect the importance of adapting leasing strategies to local conditions, as well as the diversity of expectations and risk perception according to location, with a notable relationship between the size and urban and population density of the regions, and the durability of the contracts, suggesting that cities with higher density and economic activity tend to generate higher levels of confidence among tenants, resulting in longer-term lease contracts. This correlation indicates that, in areas with more dynamic markets and dense populations, there is a perception of lower risk and more significant long-term growth opportunities. Therefore, tenants are more willing to commit to extended terms, seeking to take advantage of stability and future development potential.

On the other hand, there is a relationship between the duration of contracts and the class of the property. SiiLA data indicates higher-quality properties, specifically those of class A+, have the most extended validity periods (4.1 years on average). This reflects the preference for properties that offer more high-end services and amenities in strategic locations with modern infrastructure, which can justify a longer-term commitment. However, class A and B properties have similar levels (3.9 years in each case) with a slight variation (+1%) of class B properties compared to class A properties. This is due to the diversification of investment, considering that these properties usually have locations as strategic as those of class A+ but with an attractive balance between quality and rental cost.

It is important to highlight that, despite the general preference for medium-term lease contracts, evidenced by the average duration of four years in the main office markets of Mexico, the variability observed between different cities and sectors reflects the complexity of the commercial real estate market. In particular, the data reveal how markets like Mexico City and Monterrey show an apparent inclination towards contracts of 24 to 48 months with higher average monthly rents as the contractual validity increases, indicating a possible preference or premium for stability in lease contracts in submarkets with high economic dynamism. In contrast, an inverse correlation between contract duration and monthly rent has been observed in markets such as Guadalajara and Queretaro, suggesting differences in local dynamics, such as specific supply and demand or pricing strategies adapted to each market.

These variations indicate the importance of a personalized approach in market analysis, considering the duration of lease contracts and geographical and sectoral factors. Adaptability and understanding of the specific needs of each market are crucial for real estate sector actors, from investors to tenants, allowing them to optimize their investment and operation strategies in a diverse and constantly evolving landscape. This multifaceted approach is essential for successfully navigating Mexico's commercial real estate market, maximizing opportunities, and minimizing risks in a competitive and heterogeneous environment.

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