Offices in CDMX are more unoccupied than ever

In the first semester of 2018, the luxury office market of the CDMX, reported in its 6.2 million m2 an unemployment rate of 15.8%, the highest level for an equal time since registration.
Since November 2017, a building located on the corner of Periférico Sur and Alborada Street - opposite the Perisur shopping center - is looking for tenants. Next to the TMM Group logo is the announcement of Fibra Uno, the company that owns the property, which offers offices equipped for rent.

In the first semester of 2018, the luxury office market in Mexico City (CDMX) -which concentrates around 80 percent of the inventory at the national level- reported a vacancy rate of 6.2 million square meters (m2). 15.8 percent, the highest level for an equal time since registration, according to consultant Avison Young.

It is a space of almost one million square meters empty and that is equivalent to the Gross Profitable Area (ARB) of the Insurgentes Corridor (which includes real estate such as Patriotismo 435, Corporativo Caracci and Citi Center).

In addition, the Avison Young expectation is that the luxury office segment will close this year with a 17 percent vacancy.

Despite these numbers, real estate experts agreed that we can not yet talk about oversupply of offices, and that it will be the size and dynamism of the market that will define if that point is reached.

"Talking about 15 percent in unemployment is not yet a red light. It is not something serious because the absorption dynamics is still healthy, "said Víctor Lachica, CEO of Cushman & Wakefield Mexico.

On the other hand, Guillermo Sepulveda, partner and general manager in Mexico of Avison Young, warned that there are corridors in which unemployment is no longer healthy, such is the case of Periférico Norte, where the availability rate is 38 percent, detonated by the projects delivered in the last year.

Sepúlveda commented that this could also happen in the Insurgentes Corridor, since there are four to six deliveries of real estate on the doorstep.

"Insurgentes has a vacancy of 10 percent, what worries is if the absorption is going to be so high to keep the vacancy at a healthy level or if that will go off," said Sepúlveda.

According to experts, if Insurgentes reaches oversupply, its rental prices would be down, as in Periférico Norte, which has a 40 percent lower rent than the general market; that is, from 18 to 26 dollars per square meter (m2).

The experts pointed out that the boom of recent years in construction has led to this unemployment. In the first semester alone, 300 thousand m2 were delivered and 2018 will close with 730 thousand new m2, while the absorption is estimated to reach 300 thousand m2.

Lachica explained that, to continue with the absorption of between 300 and 400 thousand m2 per year, there will be office inventory for three years; but, if the dynamism drops to 200 thousand m2, it would take five years to occupy the million m2 that is currently available.

"More buildings are delivered but they are not occupied. An office building takes 12 to 36 months to consolidate, reaching 95 percent of its occupancy, "said Sepúlveda.

The CEO of Cushman recalled that, given the uncertainty of the Free Trade Agreement (NAFTA), some companies and sectors stopped their expansion and growth decisions, which directly affected the occupation of office spaces.



Fibers, exposed
Fibra Danhos, Gicsa and Fibra Uno are companies with an important portfolio of offices in Mexico City. In addition, 33 percent of Danhos' assets are corporate, so it is one of the most exposed to unemployment, according to a report on the Office Market in the CDMX that was prepared by Santander.

This Fiber registered an unemployment of 16.8 percent during the second quarter of 2018, in addition it has offices in the corridor with less occupation: Periférico Norte.

Gicsa has 20 percent of its inventory dedicated to offices, with an unemployment rate of 13 percent. The developer is building two more projects, one of which is Zentro Lomas, which will be delivered in May 2019.

Abraham Cababie, CEO of Gicsa, ruled out that the vacancy rate of the market will have an impact on the growth of the company and said that there are better times for the segment, related to the economic moment of Mexico.

The Santander report said that Fibra Uno has greater resistance to changes in the office market because its prices are the most competitive. His exposure is 23 percent with an unemployment rate of 15.8 percent.

They expect NAFTA 2.0 to reactivate demand
The recent trade agreement reached between Mexico and the United States generated optimism among investors who had remained cautious in the expansion of business.

Lachica pointed out that, just as the uncertainty over the renegotiations of the NAFTA hit in the vacating of offices in the CDMX, now the Mexico-United States agreement could boost the market. "With this possible resolution there will be a new dynamism in the absorption of offices like those that have been in the last three years," he said.

In addition, the commercial agreement will help the exchange rate to remain stable, which will favor the tenants with the rents, since these are quoted in dollars, said Sepúlveda.