While the global commercial investment market suffered a sharp decline in the third quarter of 2023, Mexico emerged as a bright spot, attracting a record amount of foreign capital and expanding its economic activity.
What were the factors behind this remarkable performance? And what are the challenges and opportunities for the future of the Mexican real estate market?
The Global Commercial Investment Slump
According to the latest report from Real Capital Analytics, the global commercial investment volume dropped by 51% year-over-year in Q3 2023, reaching $142 billion. This was the lowest level since the second quarter of 2010, when the world was still recovering from the global financial crisis.
The main drivers of this downturn were rising interest rates, slower economic growth, and global uncertainty. The U.S.-China trade war, the Brexit saga, the Hong Kong protests, and the Middle East tensions were some of the factors that dampened the investor confidence and appetite for risk.
The regions that suffered the most were the Americas, Europe, and Asia-Pacific, with investment falling by 53%, 54%, and 31%, respectively. The only region that saw an increase was the Middle East and Africa, with a 9% rise, mainly due to a few large deals in Saudi Arabia and Egypt.
The sectors that performed the worst were office, retail, and hotel, with investment plunging by 58%, 57%, and 55%, respectively. The only sector that showed some resilience was industrial, with a 9% decline, thanks to the growing demand for logistics and warehousing facilities.
The Mexican Commercial Investment Boom
In contrast to the global trend, Mexico experienced a surge of foreign direct investment (FDI) in the third quarter of 2023, reaching a record high of almost $33 billion. This represents a 30% increase compared to the same period of last year, excluding the spending on the Televisa-Univisión merger and the restructuring of Aeroméxico.
According to Cushman & Wakefield, a leading global real estate services firm, the commercial real estate sector in Mexico City attracted more than $1.5 billion in investment in the third quarter of 2023, surpassing the global average and setting a new record. The firm also reported that the office market in Mexico City continued to recover after the pandemic, with a decrease in the vacancy rate and an increase in the rental prices
The main drivers of this increase were nearshoring, public investment, and private consumption.
Nearshoring refers to the relocation of production or services from countries with higher costs to Mexico, which offers lower costs, proximity to the U.S. market, and a skilled labor force. Public investment was boosted by large infrastructure projects, such as new refineries and trains. Private consumption was supported by a strong labor market, higher real wages, and resilient remittances from the U.S.
The sectors that benefited the most from this influx of capital were manufacturing, energy, and transportation.
The manufacturing sector received $11.8 billion, mainly from the U.S., Canada, and Germany. The energy sector received $7.2 billion, mostly from the U.S., Spain, and France. The transportation sector received $5.4 billion, largely from the U.S., Japan, and China.
The regions that attracted the most FDI were the central and northern states, especially Mexico City, Nuevo León, Guanajuato, Querétaro, and Jalisco. These regions have a high concentration of industrial clusters, urban centers, and trade corridors.
The Challenges and Opportunities for the Mexican Real Estate Market
Despite the impressive performance of the Mexican commercial investment market in Q3 2023, the country also faced some challenges that could limit its potential growth and competitiveness in the future. Some of these challenges are:
High inflation: The annual inflation rate in Mexico reached 6.4% in September 2023, the highest level since December 2017. This erodes the purchasing power of consumers and businesses, and puts pressure on the central bank to raise interest rates, which could slow down the economic activity and the credit market.
Strong peso: The Mexican peso appreciated by 8.7% against the U.S. dollar in the third quarter of 2023, reaching 18.5 pesos per dollar. This makes the Mexican exports more expensive and less competitive in the international market, and reduces the profitability of foreign investors who receive their returns in pesos.
Low productivity: The productivity level of the Mexican economy remains low compared to other emerging markets and developed countries. According to the World Bank, the labor productivity in Mexico was $21.6 per hour in 2022, while the average for the Latin America and Caribbean region was $25.9, and the average for the OECD countries was $54.6. This reflects the structural problems of the Mexican economy, such as informality, inequality, corruption, and lack of innovation.
However, these challenges also present some opportunities for the Mexican real estate market, such as:
Diversification: The Mexican economy has a high degree of diversification, both in terms of sectors and trading partners. This reduces the dependence on a single source of income or demand, and increases the resilience to external shocks. The Mexican real estate market can benefit from this diversification by offering a variety of products and services to different segments and niches of the market, such as affordable housing, luxury properties, coworking spaces, green buildings, and smart cities.
Integration: The Mexican economy has a high degree of integration with the U.S. economy, which is its main trading partner and investor. This creates a strong link between the two markets, and a positive spillover effect from the U.S. economic recovery and growth. The Mexican real estate market can benefit from this integration by leveraging the synergies and complementarities between the two countries, such as cross-border investments, joint ventures, and strategic alliances.
Innovation: The Mexican economy has a high potential for innovation, which is the key to increasing productivity and competitiveness. According to the Global Innovation Index 2023, Mexico ranked 55th out of 131 countries, and 2nd in Latin America, behind Chile. The Mexican real estate market can benefit from this innovation by adopting and developing new technologies, processes, and business models, such as digital platforms, blockchain, artificial intelligence, and big data.
The Mexican commercial investment market outperformed the global market in Q3 2023, thanks to the favorable factors of nearshoring, public investment, and private consumption. However, the country also faced some challenges, such as high inflation, strong peso, and low productivity.
These challenges also offer some opportunities for the Mexican real estate market, such as diversification, integration, and innovation. The future of the Mexican real estate market will depend on how well it can adapt and capitalize on these opportunities, and overcome the challenges.