Mexico’s Real Estate Sector Could Be About to Plummet, Here’s Why

In the face of the COVID-19 pandemic, Mexico has introduced a mix of mandatory and non-mandatory lockdowns for commercial operations, depending on whether affected organizations are considered essential. For IT companies, this means that most employees are now working from home. This shift brings a whole new dynamic to the commercial real estate situation. Will these changes be temporary, are are we witnessing a fundamental shift in the way work is done in the Mexican IT industry?

Rodrigo Baz, Founder at The Baz Advisory Group and a commercial real estate strategist, already sees IT companies re-thinking their strategies on how they manage physical spaces.

“One client has realized that their physical facilities are not really that relevant to the operation of their business, and they are analyzing the possibility of reducing their real estate occupation by 80%,” Baz told Nearshore Americas.

Despite this example, Baz thinks the crisis will reveal the importance of social engagement at work. “Even when people can be more productive when working from home, they need to socialize. Possibly, when this is over, we will probably see the industry resuming office operation, or a mix, some days work-at-home, some days at the office,” Baz said.

Real Estate Dynamics During the Crisis

In the present moment, Baz sees two points of pressure. One is ongoing operational costs, and the other one is the future strategies of leasing space. Both factors will begin to grow more clear once companies are beyond the lock-down phase and can assess how best to operate.

“From the first perspective, as companies see a reduction in the demand for their services or in their capacity to provide them, they have high operational costs and less income. Many companies are renegotiating their real estate contracts. They are requesting immediate discounts in their leases, be it as credit or for the difference to be paid in the future,” Baz said.

“One of my clients owns commercial squares focused on technology. They had 11,000 spaces in the country, and they decided to forgive 90% of April’s lease, and they will probably do the same for May and June,” he added.

Baz thinks that many SMEs will probably have to cease to operate or finish their leasing contracts in advance because they will not be able to cover their minimum costs of operation.

“In the buildings that I represent, we have had practically zero activity in the past 12 months. So, when it seemed that the situation was about to become stable, and there was a bit more movement, the pandemic started, and now we are paralyzed. Some of my colleagues have been telling me, since January, that they are desperate,” he added.

Future Concerns for the Sector

Baz is concerned for the real estate industry going forward, considering that it was already in bad shape before the pandemic. He believes this is related to decisions made by the government of Andrés Manuel López Obrador.

“There have been messages from the government that haven’t been well received in the business world. This is reflected in the absorption of office spaces in Mexico’s main cities (Mexico City, Guadalajara, and Monterrey), which was reduced to a historic minimum not seen since the 2008 recession,” Baz said.

“In the buildings that I represent, we have had practically zero activity in the past 12 months. So, when it seemed that the situation was about to become stable, and there was a bit more movement, the pandemic started, and now we are paralyzed. Some of my colleagues have been telling me, since January, that they are desperate,” he added.

In this context, Baz expects the availability of office spaces to increase because the trends show that companies will cancel their leases or reduce the overall amount of space.

Baz is not particularly optimistic about the economic environment. Most leasing contracts in Mexico are calculated in US dollars, even when they end up being in paid in Mexican pesos. Because of the recent devaluation of the peso, the leasing cost has also increased for companies in the country.

“Mexico’s investment-grade certifications about to be become non-investment grade, mainly because of social and economic decisions by the government. This is not necessarily related to the pandemic. Still, all these factor sum and companies that were considering establishing themselves in the country or grow their operations here are delaying or canceling their plans,” Baz concluded.