The oversupply of corporate space, falling prices, declining construction volumes, continuing unemployment and unrealized demand is the panorama facing the market. 

2020 turned out to be a complex year in all areas where the global health emergency originated by COVID-19 affected the economy as a whole and slowed down productive activity in Mexico during the months of April and May, and in June it reactivated but within the framework of a new normality. Our human condition is concentrated in various residential, work and recreational environments that are directly associated with real estate and have been a refuge for investment of business and family assets, including the office market, which in our country has had a significant boost once it was institutionalized from the creation of Real Estate Investment Funds (Fibras) and other investment vehicles on which the property is based.

Image 1: Office vacancy volumes per market in square meters (m²), at the end of the fourth quarter of 2020. 

Source: Solili, January 2021.

At the beginning of the pandemic, the country's main office market, Mexico City, showed signs of oversupply, an indicator that was affected throughout the health emergency and that by the end of 4Q 2020 closed with a vacancy in square meters 40% higher than that reported for the same period in 2019, which is around 20%. On the other hand, the second most important market, Monterrey, reported a 32% increase in vacancies. Guadalajara and Puebla are the markets that have remained with relatively stable vacancies. Guadalajara due to supply and demand at similar levels and Puebla due to a market with little movement in supply and demand for corporate space. Tijuana also presented notable increases in vacancies, as an effect of slow demand and the increase in the completion of projects that enter vacant inventory. This market went from 7,700 sq. m. of vacant space at the end of 2019 to almost 35,000 sq. m. at the end of the last quarter of 2020. Despite the fact that the corporate markets of Merida and Leon are below the levels of over-supply, the rates of these are 12.4% and 10.8%, respectively, for now they have lower inventory volumes than the markets mentioned above, however, they are cities with high construction volumes, which are expanding the supply, so eventually the vacancy rates could increase.  

Image 2: Average office rental price per market (USD/m²/month), at the end of the fourth quarter of 2020. 

Source: Solili, January 2021.

Pressured by the high volumes of vacancies in the country's office markets, rental prices in the majority registered downward adjustments, mainly in Puebla and Guadalajara, which see their average rental price drop by almost two and one dollars, respectively. With a similar downward adjustment trend, the average price per square meter in the capital closed with an annual decrease of 3%.  On the other hand, despite the fact that the Merida market is growing, prices are above the national average and only below consolidated markets such as Mexico City and Guadalajara. Tenants continue to make downward changes in the starting prices and with changes in the type of currency in which the contract is closed, resulting more frequently in the signing of contracts in Mexican pesos, which was previously done in U.S. dollars. In order to make office rentals more attractive and to provide incentives for leasing, corporate space marketers have launched campaigns with special discounts on rental prices, decreases in maintenance prices, contracts with shorter lease periods, and offers of furnished offices, among other adjustments.

Faced with a panorama of uncertainty for the demand for offices, the developers opted to postpone the start of work, stop some in the process of construction and to a lesser extent to reconvert the space into building and give it another use. The figures for the start of construction of new projects are below those reported in pre-pandemic periods. All of this has led to a decrease in construction volumes at the end of 2020 in most markets. Querétaro and Monterrey recorded volumes 15% lower than in the same period of the previous year, although in the case of Monterrey, the fourth quarter of 2020 saw the start of work on a mixed-use project where 28,000m² of offices will be located. In Mexico City, which has a little more than one million square meters of construction, it showed an annual contraction of almost 13%, of which 90% is located on the Insurgentes, Reforma, Polanco and Santa Fe corridors. In the case of Guadalajara, no project began construction this quarter and some planned works are waiting for clear signs of demand to begin. In medium size markets, as is the case of Tijuana, Puebla, Leon and Merida, construction remains high in relation to their inventory, there is a particular interest of investors to offer spaces in cities with economic growth such as those mentioned above, so they have begun to turn to these markets as a viable investment option and that national and foreign companies consider these cities to establish their central corporate. 

Image 3: Office construction volumes per market (m²), at the end of the fourth quarter of 2020. 

Source: Solili, January 2021.

In 4Q 2020, in terms of demand, for the third consecutive quarter, Mexico City reported a negative figure of 121 thousand m2 , but 33% less than that reported at the end of 3Q 2020. These numbers indicate that more space is being vacated than occupied. This factor continues to be a behavior that is maintained in this market and the one that suffers the most. Unlike what happened in other markets, Monterrey and Guadalajara closed the quarter with positive net demand that increased by 100% and 43%, respectively, compared to 4Q 2019. In Monterrey, corridors such as Santa Maria and Centro experienced a boom thanks to sales that took place in spaces larger than 1,000 m2 , while in Guadalajara, demand was influenced by the completion of construction work on two buildings that entered the inventory with high occupied volumes, which directly impacted net absorption. In general, the demand for offices in almost all markets in the country is far below what was reported in pre-pandemic periods. 

Image 4: Office demand volumes by market (m²), at the end of the fourth quarter of 2020. 

By 2021, there is no doubt that developers are facing great challenges, from building smart, safe spaces to adapting places for coworking, which will be more highly valued, as a new business model. Additionally, the spaces that already exist with this modality have made their permanence plans more flexible by combining days of physical presence at the headquarters and days of remote work, in order to provide a more competitive price for the lessee. This scheme will be applied both for buildings that are 100% office and apartment buildings, since including a business center within the amenities will be attractive for those seeking a space to live and work, in addition to other forms that may arise from changes in lifestyle that brings the health emergency.

Even when the office panorama is adverse in the short term, investors bet on this segment, study the cities and exploit their opportunities in order to generate economic income. If we add to this the fact that the owners of the land are willing to lower their price expectations, it is possible to establish adequate profitability parameters.