Demand in Key Cities. 60% of High-Quality Offices in Mexico are Delivered Pre-Leased

In Mexico's major cities over the past five years, six out of every ten high-quality office buildings (Class A+ and A) have entered the commercial real estate market with pre-lease agreements. This means that these properties were already partially occupied before their official completion. While the presence of pre-leased offices indicates significant demand for corporate spaces nationwide, there has been a slowdown in the delivery of pre-leased offices since 2020, according to data from SiiLA. The amount of pre-leased inventory still hasn't reached pre-pandemic levels. Nevertheless, as office spaces adapt to new work needs, featuring flexible contracts and setups conducive to hybrid work, a gradual recovery is anticipated from 2023 onwards.

Available information suggests that the supply of new pre-leased Class A+ and A offices in Mexico's major cities has decelerated since 2019. On the one hand, SiiLA's data reveals that the number of offices entering the market with some degree of occupancy decreased by half during this period, while the average vacancy rate of new inventory rose by 46% in real terms.

The decline in new pre-leased office deliveries and the increase in average vacancy rates for new inventory over recent years indicate a shift in demand from companies seeking office spaces. This change is due to heightened caution in absorbing spaces, triggered by economic and labor uncertainties stemming from the coronavirus pandemic, as well as competition between traditional office spaces (primarily Class B) and the new high-quality deliveries in the market.

In general, the outlook for recovery in occupancy, stable market prices, and the resurgence of new deliveries in Mexico's leading office markets suggest that there will be a gradual upswing in pre-leased inventory in the medium term (within five years) as long as economic and labor conditions continue to improve. This is contingent upon workplaces adapting to technological needs, flexible work preferences, a balance between remote and in-person work, and shifts in work culture.

Another essential aspect is location. SiiLA Market Analytics data shows that around 1.5 million square meters of Class A+ and A office space were delivered in Mexico's major office markets over the last five years. Approximately 970,000 square meters hit the market with some level of occupancy. However, average vacancy rates for new inventory in the last five years were lower in certain regions of the Bajio area, such as Guadalajara (47%), as well as in parts of the Central and Northern regions, specifically Queretaro (51%) and Monterrey (66%), in comparison to Mexico City (73%), the most competitive market and home to the country's primary Central Business District (CBD).

Speaking about location, it's important to note that diversifying markets will be crucial to ensuring resilience and success in office space investment and occupancy strategies.Choosing cities with lower supply saturation and an environment conducive to attracting and retaining talent can offer significant competitive advantages. Conversely, cities with higher supply saturation may face challenges in terms of competition and prices. Furthermore, connectivity, infrastructure, and services available in each location will also play a pivotal role in the decision-making process for office space investment and occupancy. In this context, companies must carefully assess their operational needs, growth strategies, and work models to make informed decisions about selecting locations that align with their long-term objectives.

For more information about office market trends in Mexico, you can explore SiiLA REsource or contact us at contact@siila.com.mx.