Real estate in Mexico City since NAFTA
By Carol López-Bethel


Mexico City's real estate office market has made significant advances over the last decade. Whereas NAFTA was the catalyst for change, other factors, such as improved telecommunications, privatization and even the crime rate also are impacting this market’s evolution. Although still somewhat confusing for many newly arrived U.S. corporations, Mexico City now enjoys an unprecedented level of modern and sophisticated real-estate offerings. In the last five years alone, immutable changes to the business processes of the developers and users of commercial space have been set in place. Real-estate service providers are striving to meet the demands of this new client base.

THEN

Prior to NAFTA, Mexico drifted in and out of protectionist policies which cut off many outside influences. The 1982 oil crash crushed new development in Mexico City for almost a decade. Later the 1985 earthquake compounded the supply problem by destroying an estimated 500,000 square meters of office space in the Centro, the central business district. Hence, the increase in demand for office space brought on by NAFTA in the early 1990s was met by an inadequate and obsolete supply. In addition to meeting the demand for increased supply, other factors needed to be addressed as well. The older buildings commanded exceedingly high rents by U.S. standards, yet, in general, they had small floor plates, inadequate electrical and telecommunications capacities, limited, if any, HVAC, poor parking, antiquated life safety systems, lack of elevators, and inefficient column sizes and spacing. The terms under which even this category of space was leased left much to be desired. Little or no improvements were provided by landlords and a tenant’s construction costs were often amortized over very short lease periods. Many commercial tenants resorted to moving every few years in search of a better deal.
Mexico's Federal District (D.F.), like many Latin American capitals, was traditionally a condominium and owner-occupied market. Companies preferred to own their own space as a hedge against rampant inflation and other uncertainties. With good reason, as tenants faced the following problems:

• Lack of Standardization. Key lease term terms, such as method of area measurement, payment of rental tax and provision of common-area maintenance, generally differed from building to building.

• Inflation and Currency Roulette. Uncertainties associated with negotiating an inflation adjustment factor (Mexican versus U.S. consumer price index) and payment currency.

• No allowances for interior construction. New buildings were offered in “obra negra” or cold, dark shell condition, many without base building bathrooms. Rent was paid during the full construction period for tenant improvements.

• Lease term. The typical lease term was under five years and renewal or expansion options were rarely granted.

NOW

Today, changes in the way space is developed, financed and marketed have brought major benefits for the commercial tenant. The rental market has evolved over the past seven years through the influence of local and multinational partnerships who own and develop speculative and build-to-suit office and multi-use projects. The introduction of more reasonably priced, fixed-rate mortgage financing from outside lenders has provided a major breakthrough in the development market. The influx of large multinational real estate services firms has helped raised the bar for commercial brokerage standards and practices.

With the help of new development patterns, Polanco, Lomas and Bosques de Las Lomas emerged in the late 1980s to early 1990s as the new business districts. Most recently, Santa Fe has taken its place among the most successful office/commercial/residential developments in Latin America. These areas remain in high demand due to their perception of relative safety from crime, pollution and seismic activity. They compete for the attention of the high-end commercial space user, and competition leads to supply-and-demand-driven pricing.

Office demand is currently experiencing only an incremental increase from new companies coming into D.F. However, Mexico’s U.S. debt repayment record and recent positive posting in gross national product may spark confidence for the return of global investment.

A wide range of alternatives of varying cost, quality and timing exist for companies staging an entry into this market. There are approximately 600,000 square meters of new construction underway, in various stages of delivery. If all currently planned projects are completed, the significant amount of new product coming into the market should make all building owners more competitive. The end result hopefully will be lower effective rental rates and more flexible deal structures.

STILL CHANGING

“If you don’t know where you are going, any road will take you there.”--Alice In Wonderland, Lewis Carroll

Many companies are entering the Mexican market via every method available -- partnering, joint ventures, strategic alliances, multinational mergers and acquisition of foreign firms. As the United States' second-largest trading partner, Mexico will remain a destination for expanding U.S. businesses. In the rush to bring global expertise to the table, many companies are skipping over some of the most logical steps required to meld their business and cultural practices, which may be at odds with their new Mexican partner. Some of the most common elements of failure in new ventures are: lack of experience in operating within an alliance, cultural differences and poorly communicated operating principles. Most of these barriers can be overcome in time with good communication and a strong commitment from management to clearly define each partners role and to monitor performance closely.

Likewise, many real-estate companies are finding this type of exponential growth difficult to manage through the transition into a new market and it is often the end-user who suffers when there are weak links in the service and communications lines. Real estate is still a local business, but decisions cannot be made in a vacuum. Meeting expectations in a global environment requires responsiveness to new business processes brought on by technological advances, economic uncertainty and geopolitics. Understanding and sensitivity to cultural differences is a key ingredient to success. Companies must correct missteps quickly and efficiently.

The international corporate portfolio manager must implement comprehensive strategies that also address these sensitivities. He or she must delineate the action steps required for each assignment, negotiate the quality and type of deliverables to be used and create a schedule for completion of each task or event. Take small steps and notes along the way, because things are done differently in Mexico.

Newcomers should always seek objectivity from their real-estate advisers. This simple concept takes on increasing importance in Mexico, as in many other world markets, where most commercial real-estate professionals are often developers or developer representatives. Tenant representation is a nascent concept in most places outside of the U.S. and parts of Western Europe. Many firms offer “finding services” for space without full transaction support or follow-up. When entering Mexico or any new market, companies should select service providers who share their philosophy. This can only be learned by interviewing each candidate before every assignment to access their current availability and potential for conflicts of interest. This helps to ensure that any benefits to be gained within a transaction will be leveraged to their advantage.

Before leaving home, companies that are contemplating first time expansion into Mexico should make use of the information available to them through the U.S.-Mexico Chamber of Commerce and other sources. An experienced real estate adviser or consultant can help a company identify, retain and instruct a Mexican real estate firm according to their mission. They can help create a bridge between the client’s expectations and concerns and the realities of a given marketplace. They can help “fill the gaps” left by the uneven professional standards and dissimilar practices of local service providers and landlords. They may also be able to provide on the ground support by an experienced adviser.

Carol López-Bethel is senior vice president of The Rome Group Inc. She has more than 19 years of successful experience in commercial real estate, with a diverse background in providing real estate advisory services to clients in the Washington metropolitan area and worldwide. In addition to Mexico, she has worked on real-estate transactions in 25 countries in Latin America, Europe and Africa. The Rome Group is a real-estate advisory firm that exclusively represents the global interests of corporations, organizations and government agencies who lease or own commercial space, wherever they have current or planned locations. The Rome Group (www.romegroup.com) is the Washington metropolitan area affiliate of Corporate Real Estate Service Advisors (CRESA), the largest alliance of independent corporate real-estate service providers in North America with a focus on tenant advisory services. The Rome Group provides a single point of contact for all aspects of the acquisition of leased or purchased facilities.

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