NAI Mexico | 2021 The NAI Mexico Industrial Survey

1. Survival & Success - 2020 Retrospective	2. Tenants & Occupiers Operating in the New Normal	3. Industrial Owners Perspectives for Success	4. Pacific Rim Migration - Why Mexico?	5. 2021 - 2022 Mexico Industrial Real Estate

During the last decade, Mexico’s industrial market has seen significant, continuous growth in size, production, and exports. The 2020 pandemic caused major disruptions worldwide, grinding global economies to a halt. Mexico turned the corner from 2019 with rapid activity in anticipation of the USMCA implementation in July. Yet the calendar year promise faltered by the end of Q1, reflecting disrupted markets reeling from plant closures, supply chain disconnection, and uncertain labor availability. Through it all, we’ve tracked Mexico’s industrial real estate Survival and Success.

To wrap up the year, the NAI Mexico Business Intelligence team conducted The Mexico Industrial Survey. The staff contacted more than 5,000 owners, operations, and government agency managers to forecast expectations for 2021. These interviews were conducted from October – December 2020, to share perspectives from a variety of executives regarding industrial realestate owner views, tenant occupier views, Pacific Rim Migration, supply chain, and expectations for 2021.

This summary reflected surveys or interviews from all 31 states in Mexico with a special emphasis targeting states with the highest industrial activity. The results follow.

Initial reaction to the pandemic caused temporary plant closures resulting from government sections and supply chain disruption. A booming January led to an austere April. Manufacturing exports fell significantly during Q2 but bounced back during Q4 demonstrating the resilience of the manufacturing sectors. Success resulted through the implementation of mandatory safety guidelines, transitioning for a return to a “new normal”

While many sectors were heavily affected, Mexico’s industrial markets survived to end 2020, with more stable outcomes and a new normal fueled by increased demand for more distribution centers, logistics services and e-commerce.

The Tier-One industrial destinations such as Mexico City, Monterrey, Guadalajara, Tijuana and Juarez each charted different path forward during 2020. Mexico City, long sheltered from economic swings of the rest of Mexico, continued new development in Estado de Mexico northern markets. More than 60% of the year’s activity in these markets was logistics related, supplying the urban cores to the South.

Tijuana and Juarez each benefitted from proximity to international border gateways, and rebounded quickly with Tijuana attracting large medical device and electronics projects and Juarez receiving new electronics and automotive investments. Both received new
investment from Pacific Rim operations taking advantage of their ability for overnight delivery to much of the Central and Western U.S.

Health and Sanitary Measures

2020’s pandemic forced global manufacturers to rethink operations and supply chain use. Continuity of operations and increasing dependency on Low Cost Countries (LCC) came sharply into focus– overlapped by health restrictions.

The new normal” and sanitary protocols in March and April 2020 triggered plant closures and surprise health inspections. Nearly 90% of global firms in Mexico invested heavily in sanitary equipment, while more than 70% modified facility access. More than 50% modified employee dining areas, and interestingly, more than 65% modified transportation processes for employees.

Other main concerns. At year end, the vast majority of operations managers were also monitoring security/sanitary (88%), the economy (84%), and political leadership (71%). These risk assessment factors scored similarly in previous years.

The Biggest Challenge | Globalized Supply Chains to Remain –

But Where to Put Them?

Site selection for manufacturing companies has always relied on labor rates, real estate costs, educational skill sets, and transportation expenses. The North American supply chain has deeply integrated during the last 20 years and generally resisted disruption from undue political influence. When the pandemic disconnected Asian source links for raw materials during 2020, it severely impacted the automotive, electronics and other sectors.

Production rebounded by Q4, but the stage was set for critical review of firms’ transportation systems and how to plan for 2021. Now operations are seeking to distribute directly from their Mexican distribution centers, with 52% describing plans for more connectivity from Mexico. 22% are planning to expand existing distribution centers in 2021, and 22% are also considering third party (3PL) support. 12.1% of firms surveyed will search for additional facilities.

In 2021, Mexico is destined to become an even larger part of the supply chain through Pacific Rim re-shoring.

With real estate cycles lagging economic cycles, industrial owners in Mexico with projects in process, pressed forward during 2020. In January, owners enjoyed relatively low vacancies, continued tenant activity, and high expectations driving industrial park expansions. Others sought new sites for land banking and enjoyed unprecedented access to capital.

By mid-year the pandemic overwhelmed construction and tenants requested rent relief for low functioning factories. Yet construction again resumed as “essential service,” the supply chains reignited, and by Q3, border markets such as Juarez and Tijuana accelerated. Other markets like Monterrey and Mexico City enjoyed activity, but were faced with excess inventory and greater tenant demands for concessions. Through this, the industrial market did not experience the same correction for lease rates and vacancies as the office market.
By December owner/developers’ greatest concerns had switched from health to political climate (83%) and economic instability (78%). Security remained similar to previous polls for 72% of owners, but raw material and labor costs fell in comparison. Those categories ranked higher with tenants.

During these same periods, national and more institutional owners expanded the use of CKD’s and FIBRA (REIT) structures through public instruments. Some new funds raised between $100-$300 million USD.

During 2020 some of the largest owners also bet that sustainability would become more important in Mexico.

Some owners are delivering LEED certified projects as part of new developments. In December 2020, Prologis became the first REIT in Mexico to offer a green bond, with its $375 million offerings.

During 2020, Mexico’s state economic development executives (mostly SEDECO’s) were confronted by national disruption. Beside major concerns on health; their main concern was and remains a foreign perception of Mexico (88.24%)
This is an interesting perspective from the state level, driven by the de-construction of the federal Promexico trust fund in 2019. The 50-year fund had maintained 48 business development offices

Pacific Rim investment in Mexico has arrived in waves since the 1990’s. It began with the Japanese and Korean’s establishing television factories in Baja. From 2002-2003 portions of Japanese production were moved back to the new SEZ’s on the East coast of China. Early in the decade, Taiwanese arrived to assemble components for computers in Juarez, Mexicali, and Tijuana. Again, portions shifted back to the Pacific Rim during the crisis after 2008.

During the Trump administration, political/economic threats to China launched an entire new Pacific Rim migration cycle.

By 2020, global manufacturers were considering Mexico again. Not only for its unique geographic location, infrastructure, growing labor force population, and low costs; but for its 14 Free Trade Agreements spread across 50 countries.

The view from the Pacific Rim is not homogenous. Japanese and Korean companies maintain a 20-25-year head start in Mexico. While the Chinese are receiving the attention, Korean overseas contracting was quietly up 70% during 2020 with over $6 billion in Latin America.

Taiwanese companies launched significant industrial investments between 2000-2005 and are now contract manufacturing for several Japanese consumer electronics brands.

Chinese firms are recent to the scene, but preparing waves of investment to compensate for late arrival, and potentially avoid future tariff restrictions.

Finally, global firms operating in China are quickly adopting a China +1 policy.
Understanding need to balance risk those that will remain in China will seek second platforms in Vietnam, Thailand, India, and finally Mexico.

Mexico’s nearshore cost advantage is compelling.
• 23% less than China

• 50% less than the US

• Labor rates less than China since 2014

• Overnight delivery to large parts of the U.S.

As of December 2020, Mexican economic development agencies are scrambling for strategies to capture large parts of 2021’s Pacific Rim migrations, which is coming again.

GLOBAL OPERATIONS/TENANTS

The Mexico Industrial Survey revealed that 49.3% of manufacturing companies in Mexico believe Supply Chain improvement represents their major focus for 2021.
This improvement needs to be realized in making supply chains more efficient and acknowledging that single source locations do not perform as well as distributed systems. It is unrealistic to expect that all operators will abandon China anytime soon, especially as the Chinese economy is rebounding. But to mitigate future disruptions, the majority of global firms will move quickly during 2021 to China+1 options.

Aside from Southeast Asia, the most beneficial cost center is Mexico. As global operations assess the growing geopolitical and economic tension between China and the US during 2021, the Mexico option will supersede the uncertainty further offshore. It is also evident that reshoring will not bring large blocks of manufacturing positions back to the U.S. Mexico’s integration into the North ‘American production platform already exists and the comparative advantage will become more exaggerated in 2021.

More than 25% of the respondents advised they are already planning facility expansions during 2021. This trend is expected to grow by Q2.
These plant expansions also coincide with work-force projections. While 50% of operations man-agers expect their labor needs to remain constant, more than 30% are already projecting significant increases for the year. About 20% of the plant managers expect to decrease labor levels during 2021.

Mexico planning managers are becoming more confident regarding their operations positions distributed across multinational platforms within their organizations. The same is true for multiple locations in regions. Fully 36% indicate a desire to consolidate, but not to scale down operations. The view is to leverage the trend to build more campuses for management efficiencies.

The managers project growth to be faster than some of their corporate counterparts, so the site selection is focusing to identify locations with growth potential, whether they are owned or leased. Conservatively, only10% are sharing plans to consolidate operations to Mexico from other locations and that type of confidentiality is warranted. Yet more than 33% advise they need to expand facilities to handle growth.

INDUSTRIAL DEVELOPERS/OWNERS

The Mexico Industrial Survey confirmed that during Q4 2020, owner motivations and points of view had not changed significantly from Q4 2019. Owners are more risk-averse to several categories of concern for tenants and government economic development agencies. While owner/developer concerns include many of those same criteria, historically the owner/developer group is even more concerned with political instability.

This manifests primarily with regulation and permitting for development, taxes, and environmental regulation. It is relevant for owners at federal, state, and municipal levels in Mexico, creating a high level of reporting and compliance activities for both new development and existing assets.

This political uncertainty increased with the election of the new Morena party also which swept many positions at state and local levels.
2019-2020 demonstrated political uncertainty as owners worked through new policies implemented by the new administration.

Owners are continuing to develop projects to meet industrial demand, but they find more regulation and complications than in previous administrations. 2021-2022 is expected to bring more of the same.

More than 41% of all owners surveyed believe they will encounter Pacific Rim clients during 2021-2022. This is the first time we have noted such similar expectations for both Pacific Rim and U.S. prospects.

* The opinions expressed in this report and by survey respondents reflect market conditions in their respective local markets, which may vary considerably among the markets and individuals summarized in this report.
* All data has been gathered from sources we deem reliable, however, NAI Mexico does not guarantee its accuracy.
*Unless NAI Mexico provides express prior written consent, no part of this report should be reproduced, distributed or communicated to any third party.

Export graphic official source reference:
Source INEGI; OECD (2020), OECD Economic Outlook, Volume 2020
Issue 2: Preliminary version, OECD Publishing, Paris, https://doi.org/10.1787/39a88ab1-en.
PWC References: Cost saving Mexico 23% and the labor cost line v china
Reporte: Price Waterhouse Coopers Mexico August 2020: Más allá de China:
Hacia una Mayor Diversificación y eficiencia de costos en las cadenas
de suministro / https://www.pwc.com/mx/es/opinion/mexico-destino-manufactureras-estadounidenses.html.

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Health and Sanitary Measures

The Biggest Challenge | Globalized Supply Chains to Remain –

GLOBAL OPERATIONS/TENANTS

INDUSTRIAL DEVELOPERS/OWNERS

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