By Alejandro Delgado, SiiLA
Many institutional players in the real estate market have taken refuge in industrial assets. It is no secret that the main logistics and manufacturing markets are going through one of the best moments in their fundamentals, causing an appreciation in the value of real estate, particularly in recent quarters, where we have seen the highest returns in recent years.
According to the SiiLA Mexico Index, the first property valuation index calculated from two approaches: return on equity + return on income; industrial assets in the country have had an average quarterly appreciation of 5.23% in the periods after 3Q 2020, which is 267 basis points higher than the quarterly average recorded for the period from 3Q 2016 to 2Q 2020.
(2022*: as of the end of 1Q 2022)
Source: SiiLA Mexico Index - IndAll
From our perspective, based on the information gathered and analyzed by SiiLA, these are some of the factors that have led to the good performance of the asset.
Increase in the cost of construction inputs: In recent days, we wrote the article "Impact of the increase in construction inputs in the industrial real estate sector," where we explained how construction costs, particularly steel, reached historic highs impacting the rental price of the main industrial markets in the country. This phenomenon also impacted one of the main valuation approaches: replacement cost, which calculates the value of a property by estimating what it would cost to build it anew.
Deficit of new inventory vs. demand for space: According to information provided by our product, Market Analytics, net absorption in 2021 was 38% higher than that recorded in 2020, and the trend suggests an increase in this indicator during 2022. In addition, inventory delivered in 2021 was lower than inventory demanded, as measured by net absorption, resulting in an overall availability rate of 3.62% at the close of 2021. So far in 2022, these market conditions are repeating themselves: greater demand for space than supply of new inventory and a decrease in the overall availability rate.
(2022* at the end of 1Q 2022)
Source: SiiLA Mexico Index
This deficit between supply and demand for industrial space has led to higher occupancy and higher revenues per square meter, thus impacting another commonly used valuation method: the income approach, which estimates the value of a property through the capitalization of the flows obtained through the net operating income of the properties.
Excess capital. At the beginning of this article, I mentioned how some investment funds have sheltered their investments in industrial assets. According to information gathered in SiiLA's Capital Markets section, during 2021 and so far in 2022, around US$800 million have been invested in acquisitions of industrial assets, being this the favorite of funds, FIBRAs and other institutional players to deploy capital.
(2022* at the end of 1Q 2022)
Source: Capital Markets by SiiLA
Looking at current industrial asset trends, we see a real estate market in Mexico that will continue to expand, especially in the northeast and northwest, where different macroeconomic factors continue to favor that region. The level of detail and depth of the research we do at SiiLA, as well as the variety of solutions we have, is crucial to be able to make intelligent decisions in a market as dynamic as the one we are going through.
SiiLA is the leading U.S.-based real estate company providing a suite of cloud-based information, analytics and intelligence solutions for the Latin American commercial real estate market, with locations in Mexico, Brazil and Colombia.