July 13, 2023 | #DatozByDatoz
The world’s largest developer of logistics buildings, Prologis, sees Mexico as one of the most benefited countries in North America from nearshoring, the strategy of moving production closer to end consumers. They consider that logistics spaces will experience a significant boost.
According to the document “Impacts of Nearshoring on Demand for Mexican Logistics Real Estate” prepared by Prologis, there are four key points in which nearshoring will drive the demand for logistics real estate in Mexico.
The demand for manufacturing spaces will also require logistics real estate. Prologis believes that the growth of automobile assembly operations will impact this demand. For every $1 billion invested in automotive factories in Mexico, it can generate between 5 and 10 million square feet (ft2) of local logistics demand.
The demand is driven by nearshoring. The annual absorption, to supply companies in the United States, increased from 3 million square feet (ft2) in 2019 to 16 million ft2 in 2022, representing an increase from 8% to 26% of the gross absorption in the country. The absorption from the relocation of domestic suppliers and third-party logistics providers specialized in manufacturing storage increased from 15 million ft2 in 2019 to 29 million ft2 in 2022, accounting for almost half of the gross absorption.
In the six main markets in Mexico, the demand for industrial spaces doubled in 2022 compared to 2019 levels, driven by nearshoring. This led to a significant decrease in availability, with rates as low as 1%, whereas the previous average was 6%.
Furthermore, 60% of the currently under-construction space is pre-leased, compared to the 36% recorded in 2019.
Such demand has led to increases of up to 16% in industrial building lease prices, the highest in the last 10 years. Prologis predicts that double-digit lease price growth will continue throughout 2023.
Changes in global supply chains have made the long-term advantages of location, free trade, and labor very attractive. In terms of location, the main manufacturing centers in Mexico are located close to the border with the United States, such as Monterrey.
Mexico is the only developing country that has free trade agreements with the United States, Canada, the European Union, and Japan. Furthermore, the USMCA (United States-Mexico-Canada Agreement) has made Mexico more competitive.
Regarding labor, Mexico has a relatively young population globally, with 42% of its population (49 million workers) aged between 20 and 49 years old. Given the labor shortage in the United States and other developed nations, Prologis considers this large pool of skilled workforce to be a significant advantage for the country.
The increase in nearshoring investments and exports will gradually rise as new capacity is added. Therefore, Prologis indicates that additional investments will continue to drive the demand for logistics real estate.
Currently, the automotive sector is leading the way in nearshoring operations, but it is expected that the electronics, appliances, and green technologies sectors will play a more significant role in the Mexican economy.
In terms of energy, Prologis states that it is expected that transmission issues will be alleviated to some extent as the federal government, states, and the private sector align themselves regarding financing and execution of the expansion of the electrical infrastructure. As of the end of 1Q 2023, Prologis owned or had investments in, either directly or through co-investment entities, properties and development projects totaling approximately 111 million square meters across 19 countries.