located in mexico city FIBRA Prologis (BMV: FIBRAPL 14), which focuses on the acquisition, ownership and management of Class-A logistics and manufacturing facilities, has never before experienced such high demand for space, as more global companies move production to the United States. Moving closer.
Following supply chain disruptions due to the COVID-19 pandemic, many companies are shifting their operations primarily from Asia to Mexico. The strategy, called “nearshoring,” is taking off with growing demand for warehouses and distribution centers in U.S.-Mexico border cities.
Nearshoring is a game changer for Mexico, says Luis Gutierrez, CEO of FIBRA Prologis, which focuses on six key markets: Mexico City, Guadalajara, Monterrey, Reynosa, Tijuana and Ciudad Juarez.
“Mexico has become a manufacturing powerhouse,” he says. “Taking advantage of its close location to the U.S. and abundant labor, well-trained and very competitive in terms of pricing, many products are made in Mexico. is collected. Companies are taking advantage of this to export products not only in the US, but around the world.
With its 2,000-mile border with the US, Mexico also offers affordable logistics, well-developed supply chains, and favorable trade agreements.
adjacent demand
About 75% of 2022 demand was nearshore related, and the uptick continues. The company’s portfolio is 98.1% leased, and net effective rent upon rollover increased 30.9% in the second quarter.
“I’ve never seen such high demand in my life, and I’ve been doing this for 35 years,” says Gutierrez.
The automotive sector is the biggest driver for space. Mexico is the largest export market for US automotive parts and the fourth largest producer of automotive parts globally.
However, other industries, including electronics and medical devices, are growing rapidly. FIBRA Prologis has a diverse customer base with over 200 customers. Its top 10 customers – which include appliance, auto, logistics and paper/packaging companies – represent 24.2% of net effective rents. Additionally, 87% are multinational companies.
Gutierrez also says most leases are dollar-denominated, which “investors like because they don’t have currency risk.” About 65% of the company’s revenues are in US dollars, and 35% in Mexican pesos.
unprecedented activity
According to a June report, vacancies in Mexico’s top six markets fell to 1.1%, and rents rose 16% – the highest rent increase in 10 years. Prologis, Inc., (NYSE: PLD), the world’s largest logistics real estate company. Prologis FIBRA is the parent company of Prologis, which owns 44% of the REIT.
Prologis forecasts another double-digit rent increase this year. Additionally, most of the industrial space under construction is already pre-leased.
Demand for space is concentrated in cities like Reynosa, Ciudad Juarez and Tijuana on the US-Mexico border, and in larger cities like Mexico City and Monterrey, where they have larger populations and access to labor.
“Monterrey’s demand has tripled from pre-pandemic levels, and Tijuana and Ciudad Juárez’s demand has doubled from pre-pandemic levels,” says Gutierrez. “Many companies are becoming more competitive by manufacturing in Mexico, and our approach is well suited to meet their needs.” The portfolio comprises 228 facilities totaling 44.2 million square feet. About 80% are in master-planned industrial parks.
Its success did not go unnoticed. Morgan Stanley raised FIBRA Prologis’s recommendation to “overweight”, while Scotiabank Mexico gave it an “overperform” rating.
“FIBRA (Prologis) is one of two companies that we see as real winners of the structural drivers for nearshoring in Mexico,” says Francisco Suarez, Director of Global Equity Research at Scotiabank Mexico.
border towns
FIBRA Prologis’ border markets in Ciudad Juárez, Reynosa and Tijuana have nearly reached capacity, and have wait-listed companies looking to expand or enter the market.
Its strategy is to purchase stable, state-of-the-art buildings that are 95% leased. The company has the right of first refusal on properties developed by Prologis in Mexico and the ability to acquire the assets from third parties.
FIBRA Prologis raised $400 million in a follow-on offering in May. “There was a lot of interest from foreign investors looking to invest in emerging markets,” says Gutierrez. “Nearshoring is very much on investors’ minds.”
Suarez agrees. He recently participated in two equity follow-ons, one of which was for FIBRA Prologis.
“I have never seen this much interest since I started covering this asset class, and from people who have never been investors in Mexico,” says Suarez. “Suddenly, many global real estate experts want to invest in structural trends, and frankly, proximity is attractive. They understand Mexico’s overall advantages not only in terms of proximity, but also in terms of the economies of scale developed by many industrial clusters over decades.
Meanwhile, Prologis will invest in undeveloped land in Mexico in 2023, taking on the risk of developing and leasing the properties. Prologis breaks ground on record 4 million square feet in Mexico in 2022,
ongoing demand
Morgan Stanley estimates Mexico will need about 140 million square feet of new inventory over the next five years because of its proximity to the coast.
“There is almost no availability of industrial real estate in Mexico,” says Nikolaj Lipman, research equity analyst at Morgan Stanley.
Due to this the rent and revenue is increasing. “The average lease spread for FIBRA Prologis has increased by approximately 40%,” says Lipman. “We have also seen leading companies in the space raising capital,” he added. “This is a surprise to many people given the recent increases in interest rates.”
Lippman says FIBRA Prologis has raised equity capital through 2023 and has a strong balance sheet for future growth. “FIBRA Prologis is well-positioned for two major secular trends impacting Mexico: nearshoring and digitalization,” he says.
E-commerce is the company’s other main driver of demand, which includes Amazon, Mercado Libre Inc. and Walmart.
E-commerce as a percentage of retail sales in Mexico is about 13%, and “we believe it could be much higher,” Gutierrez says. “What we saw in the US in terms of infill demand and last mile is that this market is just getting started, so we’re very excited about e-commerce.”
Benefits of parent company Prologis
Prologis is a market leader in the US and is one step ahead of many key trends, which FIBRA benefits Prologis from, explains Lippman. For example, FIBRA Prologis pushed for a more modern, taller product for distribution, despite higher development costs.
“Initially, there was little difference in terms of fares, and investors questioned the more expensive product produced by FIBRA Prologis. Today, not so much,” Lippman says. “As the market has evolved toward more sophisticated delivery models, we are now seeing rent discrimination and much higher leasing spreads for FIBRA Prologis.”
As a result, FIBRA Prologis is now priced about 30% higher per square foot than its counterparts, Lippman says.
Additional benefits
Gutierrez says having the largest logistics REIT in the world as your sponsor has major advantages including scale, global customer reach, data analytics and banking relationships.
Following Prologis’s lead, FIBRA Prologis has addressed environmental, social and corporate governance (ESG), which is increasingly important to REIT investors. For example, FIBRA Prologis reflects Prologis’s objectives to be net-zero by 2040.
“We are certifying all of our buildings and installing solar panels to provide clean energy to our customers because they also have net zero goals,” says Gutierrez.
This is important, says Suarez, who points to Mexico’s inconsistent energy policies with its major trading partners, as well as water tensions in areas of Mexico that benefit most from the near coast.
“Developing buildings that are less energy, carbon, water and waste-intensive is a solution to the Achilles heel of what we see in an otherwise good story as it relates to the near-shore,” Suarez says.
Additionally, in terms of governance, FIBRA Prologis has performed better, Gutierrez says. “When you look at the financial performance, our total returns are one of the highest in the sector. “One of the things investors look at is governance, and of course, transparency and planning around governance.”
Part of that governance platform is Prologis’ succession planning process in which Gutierrez will become a senior advisor on January 1, 2024, and managing director and COO Hector Ibarzábal will become CEO. Gutiérrez will remain chairman of the technical committee.
“I’ve been doing this since 1988,” says Gutierrez. “I was originally a partner at AMB Property Corp., and when Prologis bought our company, we integrated, and I led Latin America. “
A standout memory for Gutierrez is when FIBRA Prologis was introduced in an IPO in 2014. “Our performance has been very good in terms of returns for investors, an excellent portfolio and a great path forward, so I’m very proud of what we’ve built,” he says. “Now we need to bring in fresh blood, and we are excited about the future and new leadership.”
future challenges
Gutierrez says the near-term impact could be much greater were it not for power and water shortages in some Mexican markets.
“The country can take more advantage of near-term demand if we prepare well,” explains Gutierrez. “The main challenge is infrastructure including energy. Today, investment in transmission from the government is low, and getting land with energy is a challenge. Our job is to work with the government to try to promote that investment.
There are also geopolitical issues. “Mexico is full of things we can’t control,” says Gutierrez. “We have all the political activity, including elections in the US and Mexico in 2024. There is going to be a new administration in Mexico, and that will bring changes to the business environment, which is something you have to be very aware of in the emerging market.”
Despite the challenges, Gutierrez says 2023 will be an excellent year. He added, “Cycle will be in an uptrend next year and I feel very good about the company.” “We will have good chances to continue our path forward. Additionally, capital is available even in this extremely volatile environment of high interest rates. We just need to take advantage of all these trends.
