Impact of the Increase in Construction Supplies on the Industrial Real Estate Sector

By SiiLA


According to information provided by Market Analytics, a product developed by SiiLA, since the close of the third quarter of 2019, more than 3 million square meters of industrial assets have been delivered, with Mexico City and Monterrey being the markets with the highest number of deliveries, taking almost 50% of this footage. During 2020 and 2021, this pace did not slow down, despite the fact that the assets built during this period had a greater challenge, the price of construction inputs skyrocketed from mid-2020, reaching historic highs.



Source: Investing.com Commodities Section


According to an interview given to El Universal, Marcos Casarin, Chief Economist for Latin America at Oxford Economics, mentions that the increase in the price of steel has been mainly caused by 4 factors: scarcity of raw materials, high requirements of the input by China, record international demand for steel and the global inflationary increase we are going through.


Based on a survey conducted on SiiLA, to different users of the platform, steel represents between 30% and 40% of the construction costs of a building depending on the construction model (Tilt-up, Concrete, Block or Metal Sheet), therefore, the effect of this price increase was immediately reflected.


Who pays for the "broken dishes"?


Recently, I wanted to investigate more deeply what has happened to the rental price of industrial spaces and who ends up paying for this effect: the developer by sacrificing part of his return on investment, or the end user (tenant) by perceiving an increase in rent.


In order to perform a better analysis, we decided to separate the market price of first generation assets, or new deliveries, to second generation assets. In addition, we selected the two industrial markets with the largest amount of new deliveries in recent years in order to be able to perform a complete analysis (CDMX and Monterrey).


Source: Market Analytics, by SiiLA



Since the second quarter of 2020 we have seen that the market price of first generation warehouses has had a significant increase, even showing a difference of more than 60 cents compared to the rest of the market. It is important to note that in recent quarters there have been record periods in gross absorption (demand) for industrial assets, which could explain the increase in rents across the board.


However, it should be emphasized that the difference between newly incorporated properties versus the rest of the market has increased significantly as a result of the increase in construction inputs.



Source: Market Analytics, by SiiLA



Finally, analyzing the information as well as the level of detail to which we have access in SiiLA, we can conclude that, if there is a direct effect on the market price, particularly of the warehouses that are incorporated to the market, this can be explained by the increase in the price of construction inputs, the global inflation, as well as the increase in the demand for industrial spaces.


These factors impact not only the market rental price, but also the value of real estate, replacement costs and income approach valuation. Soon I will be publishing the second part of this mini-article, where I will address what is happening with cap rates, are we close to "hitting the floor" in the pricing of industrial assets? Let's see what the data tells us and what other trends are occurring.


With information from: El Universal (https://www.eluniversal.com.mx/cartera/incremento-de-precios-de-acero-en-el-mundo-se-traslada-mexico-oxford-economics) and market research conducted by SiiLA, available at Market Analytics.