American and foreign companies are moving production to Mexico in an effort to produce closer to the United States. Many of them are moving their factories from Asia because of the many disruptions that happened in China during the pandemic, as part of the “moving close” trend.
Owners of industrial properties are following these developments closely. Prologis, the world’s leading logistics company, says demand is soaring for locations in Mexico. Investors like Morgan Stanley are focusing on warehouses in border cities within the US, in states like California and Texas.
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“Today we see companies that manufacture products in Mexico and use the border for distribution,” says Lauren Hochfelder, co-director of Morgan Stanley’s real estate investment arm, which invests in properties totaling 2 million square feet.
Industrial space has been among the hottest sectors in yielding real estate for most of the pandemic, thanks to the impact of online commerce. The sector ran into some obstacles last spring after Amazon announced it was scaling back its online operations.
But rents and occupancy rates remain high through 2022, thanks in part to the modernization of supply chains that have improved efficiency, says Michael Carroll, head of real estate research at RBC Capital Markets.
More companies are willing to “hold more inventory because the loss of sales is a greater risk than holding more inventory,” he says. Moving the lines of the supply chains offers a new turn to the business sector. Foreign direct investment in Mexico totaled $32.1 billion in the first nine months of 2022, the most since 2013. In January, leaders from the US, Mexico and Canada agreed to strengthen the regional supply chain at a conference held in Mexico City.
Prologi’s announced that it owns approximately 44 million square feet of industrial space in Mexico. Last year, the company broke a record 4 million new square feet in the state.
Nir shoring (the opposite of off shoring, the transfer away from the state) also creates new demand for logistics assets in cities such as El Paso and Valardo in Texas, San Diego, and Tucson in Arizona – according to real estate investment companies. Large companies such as TPG, CBRE and Clarion have already invested in the area or are considering to do this.
While production is moving south of the border, demand for manufacturing space is also increasing on the American side of the border for certain products, such as electronic devices and medical devices. These are products that are often made in Mexico but require more skilled personnel for finishing and adjustments.
End customers also want warehouses and distribution centers in the US in order to avoid future shortages that could lead to political problems or tensions along the border.
They fear the geopolitical situation
There are logistics and manufacturing companies that started to look into the possibility of moving factories from China to Mexico even before the epidemic due to the jump in costs in China. These plans were accelerated after the pandemic created bottlenecks at ports and other supply problems. “The catalyst was the disruption of the production chains due to the corona,” says Caton of Prologis.
Mexico also wants to attract manufacturers who fear the trade war between the US and China, the war in Ukraine and other geopolitical issues. Many believe that the political risks inside Mexico are less of a concern. For example, President Andrés Manuel López Obrador is trying to regain control of electricity generation. efficiency of products,” said a spokesman for CBRE.