Although President-elect Donald Trump’s rhetoric to eliminate the North American Free Trade Agreement or erect trade barriers may challenge investors’ business plans in the near term, Mexico’s modern economy, along with its real estate market, is sufficiently flexible and resilient to withstand any potential headwinds from the new administration.
That said, trade is hardly the only driver for real estate demand in the country. Mexico’s primary industrial markets of North Mexico City, the Bajio and the border market are a case in point.
North Mexico City represents the logistics hub for the country, and it is the most active market. In the past two years, the demand for modern logistics buildings has accelerated to record levels, as has speculative construction. Demand has been driven by population growth, a burgeoning middle class, demand for third-party logistics services and e-commerce.
In the Bajio, or the northern plain, a zone two to four hours north of Mexico City, the real estate market has realized record absorption in manufacturing buildings as well, due to new direct foreign investment in the automotive sector from companies like Mazda and Nissan.
On the border, speculative construction has been moderate, while demand for assembly/manufacturing space has been flat, proving the deep integration of the Mexican supply chain with that of the US. With the strength of the dollar, US exports have been less competitive, and there has been less demand for Mexican imports, and consequentially, industrial real estate.
We anticipate strong logistics demand in North Mexico City and demand for manufacturing space in the Bajio, while the border market will be challenged until the market can adapt to the realities of any new trade legislation.
Meanwhile, the office sector is suffering from oversupply, as a result of record amounts of capital funding being invested in the development and acquisition of office space. The Mexico City office market represents 80 percent of the national office market, and the construction pipeline in the city for the next three years is at an all-time record of 20 million square feet, while there is presently 7.9 million square feet available and 8.4 million square feet anticipated to be delivered in 2017. Nonetheless, Class A absorption only accounted for a paltry 1.2 million square feet in the first half of 2016, driven by the financial services, energy, telecommunications and government sectors. Irrespective of any trade legislation implemented from the Trump administration, the Mexico City office market is going to be significantly challenged in the coming years.
Right now, no one knows what will happen in light of the Trump presidency until a cabinet is formed, the agenda is defined and decisions are made. Nonetheless, any new trade legislation will likely have more of a negative impact on the US than Mexico. For one thing, the Mexican peso has already devalued 50 percent since 2014. In the event of a 30 percent tariff, which represents a worst-case scenario that the Trump administration could legislate, Mexico will still compete on price and quality relative to the US manufacturing cost base.
Also, automation has grown in sophistication and reach. From 2000 to 2010, the United States lost some 5.6 million manufacturing jobs, by the government’s calculation. Only 13 percent of those job losses can be explained by trade, while the remaining were replaced by technology.
Again, we can anticipate slower demand as we wait for Trump’s cabinet to be finalized and his agenda to take shape. It is difficult to conceive of the construction of the Wall and the elimination of NAFTA, but as Trump’s election and Brexit have proven, we should expect the unexpected.
In either event, if Trump ignores his pledge, and NAFTA remains intact, we can expect trade to remain strong to the benefit of the NAFTA members. Consumption will continue to grow and innovations in supply chain efficiencies and the demand for space in e-commerce should fuel demand for space in Mexico’s logistics sector. Meanwhile, the country’s office sector, which is presently overbuilt, will take its time to absorb.
Conversely, if NAFTA is canceled, and exports fall, both the US and Mexico will suffer, with latter most likely falling into recession. Buoyed by moderate demand and opportunistic investors, Mexico will find a way to adapt.