Nearshoring is Driving Industrial Demand In Mexico Too

As supply chains increasingly shift away from China and closer to the U.S., Mexico has laid down the welcome mat for U.S. and foreign companies looking to relocate their operations near to the U.S. border but with lower costs. The nearshoring strategy has succeeded to the point where net absorption of industrial space in Mexico’s six main markets has doubled in three years, according to a recent report from Prologis. Much of the space under construction is already pre-leased, and rents have shot up.

The trend has created a parallel demand for warehouse space in U.S. cities along the border, with manufacturing concentrating in Mexico and distribution in the U.S., GlobeSt.com has reported. 

Prologis identified many signs that nearshoring is the underlying driver of demand for logistics space in Mexico. Annual absorption of leased logistics space for manufacturing to supply the U.S. market rocketed from 3 million SF in 2019 to 16 million SF in 2022, rising from 8% to 26% of gross absorption in the country. Tier 2 nearshoring absorption by domestic suppliers and third-party logistics providers also shot up from 15 million SF in 2019 to 29 million SF in 2022.

Another signal is that Mexico’s imports of machinery rose 52% from the pre-pandemic average of $88 billion a year to $152 billion in 2022.

An influx of global car companies that have established assembly plants in Mexico’s Bajío region is another strong indicator of nearshoring. The region includes the cities of Guadalajara, Léon, Santiago de Querétaro, and Aguascalientes. Demand for logistics space in the area has increased sharply.

In March, Tesla announced plans to build a Gigafactory in Monterrey in the state of Nuevo Léon. Prologis predicts the $5-$8 billion investment could result in 25 million SF or more of new logistics real estate demand.

“We estimate that every $1 billion invested in Mexican auto factories can generate 5-10 million SF of local logistics demand during the two years that follow,” Prologis stated.

The rush into Mexico has made industrial space scarce – just 1.1% was available in Q1 2023 in the nation’s six main markets. Space under construction is already 60% pre-leased. Consequently, these markets have experienced the highest rent growth in 10 years – 16% in 2022 – a trend expected to continue through 2023.

Proximity to the U.S. is, of course, a major advantage for Mexico.  In addition, it is a party to the vital U.S.-Mexico-Canada Agreement as well as to free trade agreements with the European Union and Japan. U.S. restrictions on trade with China affecting certain advanced technologies encourage nearshoring. An ample supply of lower-cost, skilled workers is another attraction. 

One disadvantage is the limitations of Mexico’s federal electric grid that sometimes forces developers to build alternative infrastructure. However, Prologis expects the problem to be overcome in time.

Prologis views all this activity as just the first wave of investment from the outside. “We expect this movement to play out over decades as local economies build a critical mass of infrastructure, expertise and suppliers,” the report stated. “This will not be limited to the already strong auto sector; we also expect electronics to take a larger role in Mexican exports.”