Growing freight flows
Monthly freight flows between the US and Mexico are now consistently surpassing those with Canada – traditionally the largest trading partner with the US.
Freight imports between the US (in USD millions)
This growth in freight flow is positive for industrial and logistics assets in Mexico, and we expect growth to continue mainly in the northern states. Juárez, Tijuana, and Monterrey account for 55% of the gross leasable area added in 2023, with an average size of 150,000-200,000 square feet. However, the average size of new assets in 2024 is expected to be around 230,000 square feet, which suggests that big-box industrials are still in vogue in Mexico. This trend contrasts with the US, where smaller facilities of below 100,000 square feet are now in demand.
Mexico’s easterly land borders are understandably receiving more attention. They provide quicker access to the bulk of the US’s population. They are also close to the majority of final assembly plants for high-value goods, such as automotives, which are concentrated around the Gulf Coast and the Midwest. Mexico also has a growing domestic market in Mexico City.
Monterrey: location, location, location
Monterrey is the second-largest city in Mexico and the one with the quickest access to the bulk of the US consumer market. It has proven to be a popular ground for manufacturing and sub-assembly, with Tesla, Unilever, Kia and Foxconn all pledging large investments into the area. Together with homegrown firms – such as FEMSA and CEMEX, which are headquartered in Monterrey – these companies are pushing industrial/logistics demand in this border market to record levels.
While the supply of industrial/logistics space has been expanding, vacancy rates are still well below 1%. They fell sharply from 7% in the first quarter of 2021, given 80% of new assets in 2023 were build-to-suit projects. Some speculative projects were completed towards the end of last year, which have pushed the vacancy rate up slightly and consolidated rent levels.
We expect rental growth in Monterrey to slow, but rent levels are unlikely to retrace further. Vacancy rates may rise as speculative assets are completed, but they should benefit from supporting industries. These include small electronic component manufacturers moving into the area and expanding the operations of bigger firms, typically tasked with sub-assembly for the automotive market in the US.
Juárez: bridging the gap
Five border bridges link Juárez to the US. There is a direct connection to El Paso and the major east-west artery of Interstate 10, if you cross the border into the US using the Bridge of the Americas.
Freight flow growth for Juárez was 9.5% year-on-year in the first quarter of 2024, coming in second behind the 10.6% growth for Laredo in Texas (the largest in terms of freight). With an increasing number of foreign firms, such as Siemens, Electrolux and Pegatron driving demand, there is limited availability in terms of second-generation space (previously occupied but now empty assets). Most of the take-up can be attributed to completed build-to-suit assets.
As more speculative space is completed, vacancy rates should continue to rise to above 2%. This could hamper rental growth, especially in the south-east and south-west submarkets. Sellers are then likely to lower valuations, which will provide a more attractive window of entry into this border market.
Mexico City: small spaces, big demand
Around 30 million people live within 50 miles of Mexico City’s centre, which is 10 million more people than in central and northern New Jersey. Given the surge in ecommerce penetration, it’s no surprise that Amazon, Mercado Libre and DHL have been expanding across the Cuautitlán, Tultitlán, and Tepotzotlán corridor in Mexico City.
Projects such as Panorama Coacalco and World Park Tlalnepantla are completing this year, and pre-leasing has been strong. Across the market, 57% of logistics and industrial space that is under construction has already been pre-leased.
Overall, vacancy rates should remain below 1%. Rental growth faces upward pressure, but there is strong demand and limited land availability in the market. More vertical logistics properties are being developed. Value-add strategies include repurposing old manufacturing buildings near the centre of Mexico City into compact last-mile logistics facilities.
Impact on US industrials/logistics
New industrial and logistics developments in Mexico will complement the growth of the logistics sector in the US. Around 80% of the US population live on the eastern half of the country and last-mile facilities remain crucial for delivering goods to their final consumers. Combined with increased land freight, markets with developed intermodal terminals and infrastructure will also benefit.
These factors align with our forecast for investment returns to be strongest around the East and Gulf Coast, and some Midwestern markets in the US with established intermodal infrastructure.