Q3 2024: Nearly One-Third of Mexico’s New Industrial Inventory Hit the Market Vacant. Why?

In Q3 2024, nearly one-third of the new industrial properties in Mexico entered the market without tenants, highlighting some of the sector's most significant challenges.

This vacancy is partly due to a mismatch between the average size of the new inventory and tenants' needs. In markets like Monterrey and San Luis Potosí, the vacant inventory was below the average absorption rate, but in Mexicali and Querétaro, it was up to five times larger, highlighting the need to adjust supply to local demand.

Mario Chapa is the CEO of VYNMSA, which delivered a vacant speculative building at the Guanajuato Industrial Park. Photo: SiiLA.

By: SiiLA News

10/30/2024

In Q3 2024, 29% of Mexico's new industrial properties entered the market with some vacancy, a volume that equates to nearly 580,000 square meters of gross leasable area (GLA). This represents a substantial one-fifth of all vacant industrial space nationwide, as per SiiLA data.

This surge in supply has a profound impact on the industrial vacancy rate—currently hovering around 3% in Mexico—and raises a critical question: Why is there new vacant inventory despite solid demand?

Key factors contributing to this situation include the lack of pre-lease agreements and the development of speculative buildings. These properties failed to attract tenants immediately due to various factors such as marketing strategies, location, market conditions, or accessibility. Additionally, the size of the properties plays a crucial role in the speed at which the inventory is absorbed.

SiiLA data reveals that in the third quarter of the year, the average size of absorbed industrial properties was 12,200 square meters, while the average size of vacant spaces was 8,900 square meters. This discrepancy suggests that supply is not fully meeting demand.

This gap points to a market mismatch. Although tenants prioritize flexibility and efficiency in their spaces, developers delivering properties without pre-lease agreements—especially those with features that do not meet immediate demand—could experience slower absorption rates, even in a high-demand market.

Regional Discrepancies

The average size of absorbed spaces tended to exceed the average size of vacant inventory.

Although the mismatch between new vacant inventory and average demand was evident nationwide, a closer look by region reveals key differences that nuance this trend.

In some areas, the delivered inventory far exceeded demand, while supply was better aligned with tenant needs in others. These regional variations highlight the distinct characteristics of each market and offer a clearer picture of how different regions performed in Q3 2024.

In the Bajío region, for example, the average size of the newly vacant inventory was 78% larger than the average size of the space absorbed in the region. In contrast, the North region saw only an 18% difference, reflecting a closer alignment between what is being built and what is being occupied. Meanwhile, the Central region saw a 47% difference, showing a mid-range trend.

Market-Specific Variations

The overall vacancy rate for industrial inventory in Mexico has increased for three consecutive quarters.

Regional discrepancies also extend to specific markets, where the supply and demand dynamics present even sharper contrasts.

In markets like Monterrey and San Luis Potosí, the average size of vacant inventory was smaller than the absorbed space, with differences of 43% and 23%, respectively. This phenomenon does not necessarily indicate a preference for smaller spaces but rather a misalignment between supply and the market's actual needs.

Since 2020, the average size of absorbed spaces has steadily increased, reflecting a growing demand for larger warehouses, particularly in the North and Bajío regions. However, when the supply does not fully match the required size—whether due to a lack of sublease agreements that could allow for space segmentation or a shortage of land for expansions—the pool of potential tenants for these properties narrows.

Conversely, in markets with the largest discrepancies, such as Mexicali, Querétaro, Aguascalientes, and Guadalajara, the size of the new vacant inventory was between two and five times larger than the average absorbed space. This mismatch suggests that the properties far exceed the market's immediate ability to absorb them in these markets, either due to size or quantity. As a result, the larger or more numerous deliveries may not be as competitive as other options better suited to current tenant needs, potentially slowing their occupation.

In most markets, the gap between supply and demand shows that the delivered inventory almost doubles the absorption rate. This landscape emphasizes the need to align the size and features of new developments with each market's specific requirements to improve absorption rates and reduce vacancy.

This highlights the fact that the challenge lies not in building more or bigger but in the ability to anticipate and adapt in a constantly shifting environment.

In an industrial market where competition has intensified with the delivery of new inventory—by institutional players and less sophisticated entrants venturing into property development—having detailed supply and demand information, like that provided by SiiLA, offers a competitive edge. This insight enables developers and investors to adjust their strategies in real-time.

Want to know the main trends in the commercial real estate market? Check out SiiLA Market Analytics or contact us at contacto@siila.com.mx.

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