Mexico City Industrial Market Vacancy Rate Down Current Conditions

RESEARCH 2Q 2019 MEXICO CITY INDUSTRIAL MARKET VACANCY RATE DOWN CURRENT CONDITIONS

• Class A industrial inventory exceeded 10.4 million square According to the IMF, growth has been revised downwards 0.9% in the meters. first half of 2019 due to the national budget under-execution, high • Vacancy rate decreased from 6.0% to 5.1%, due to transactions uncertainty around economic policies such as the reinvestment of in Cuautitlan and Tultitlan submarket. some economic policies in relation to energy and education reforms. • Quarterly absorption decreased to near 165,000 square Nor have concerns about financial health and Pemex's perspectives meters. dissipated. Despite this, it is expected to reappoint to 1.9% in 2020 as the conditions normalize. In order to promote the growth in the medium term, it will be important to promote structural reforms that MARKET ANALYSIS encourage productivity, core of the industrial market. Asking Rent Range by Submarket

$6.00 12.5% CUAUTITLAN: THE LEADER $5.00 10.0% In spite of this uncertainty, Class A inventory of the Mexico City Metropolitan Area maintains its positive trend by reporting an increase $4.00 7.5% in the inventory of about 1.0% compared to the previous quarter. $3.00 5.0% Cuautitlan leads the market with more than 3.1 million square meters $2.00 2.5% on class A lease area. This represents 30.7% of the total inventory of $1.00 0.0% the market and shows more than 47 thousand square meters under 2Q16 2Q17 2Q18 2Q19 construction, mainly developed by E-Group and Pulso Inmobiliario and Average Asking Rates Vacancy Rate will add to the inventory in the upcoming months. Net Absorption VACANCY DECREASES Square Meters (in Thousands) 600 Vacancy rate decreased from 6.0% to 5.1% during this quarter. Submarkets with the largest activity were Tultitlan, Tepotzotlan and 500 Cuautitlan. Cuautitlan reported the largest available space with more 400 than 166 thousand square meters, but with a relatively low vacancy 300 rate: 5.2%. In general, submarkets that still have territorial reserves, 200 due to a slowdown in deliveries, will experience a greater reduction in 100 their vacancy rate in the short term. 0 2Q16 2Q17 2Q18 2Q19

MIXED PRICE CHANGES MARKET SUMMARY The average asking price showed a slight increase this quarter, mainly Current Prior Year Ago 12 Month due to an improvement in the exchange rate. Cuautitlan, Tepotzotlan Quarter Quarter Period Forecast and Vallejo - Azcapotzalco, decreased up to $ 0.71 per month, while Total Inventory (sqm) 10,404,644 10,302,802 9,989,443  Huehuetoca, Tlanepantla and Tultitlán experienced a slightly increase Vacancy Rate 5.1% 6.0% 5.5%  in their average rent. Qtr Net Absorption (sqm) 165,013 254,931 237,978 

Avrg Asking Rent ($/sqm) $5.36 $5.29 $5.30 

Under Construction (sqm) 358,329 460,172 435,661 

Deliveries (sqm) 101,842 242,254 218,318 

ABSORPTION DECREASES LOGISTICS DEMAND Absorption dropped in the second quarter of the year from 255,000 Historically, Mexico shows a slowdown during the first year of a new sqm to near 165,000 sqm. One of the top deals was in Tultitlan with government, both in consumption and investment. Public expense more than 23,000 sqm. Other important deals were in MegaPark in tends to contract due to the learning curve of a new administration. In Tepotzotlan and Prologis Mezquite and Logipark in Cuatitlan. In the this context, industrial activity may downturn, at least in short term. latter submarket, there are important projects under construction such However, companies in activities such as logistics and transportation, as World Park Cuautitlan, with more than 30,000 sqm to deliver in the food and beverage, and consumer goods occupied multiple industrial next quarter. spaces, mainly in Cuautitlan and Tepotzotlan, to locate their distribution centers near the city.

ASKING RENT PER SUBMARKET ABSORPTION AND VACANCY PER SUBMARKET

Asking rent (US$/sqm/month) In square meters

$9.63 $9.50 $8.50 100,000 15.00% $8.00 $7.00 $6.57 80,000 12.00% $5.89 $6.50 60,000 9.00% $4.98 $5.32 $6.31 $5.00 40,000 6.00% $4.95 $3.50 $4.03 20,000 3.00% $3.68 $3.50 $3.42 $3.68

$2.00 0 0.00%

Toluca

Tultitlán

Cuautitlán Vallejo

Tepotzotlán

Huehuetoca

Tepotzotlán

Huehuetoca

Tlalnepantla

Azcapotzalco Azcapotzalco

MARKET SUMMARY

Under Qtr Average Inventory Total Vacancy Vacancy Submarket Cosntruction Absorption Asking Rent (sqm) (sqm) Rate (sqm) (sqm) (US$/sqm/mo)

Cuautitlán 3,196,820 47,592 166,594 5.2% 90,331 $5.17

Huehuetoca 523,689 - 65,868 12.5% 0 $3.79

Iztapalapa 247,532 - - 0.0% 0 -

Naucalpan 60,979 - - 0.0% - -

Tepotzotlán 1,506,018 111,832 131,134 8.7% 19,875 $5.08

Tlalnepantla 867,375 49,759 53,417 6.1% 13,566 $6.38

Toluca 1,859,613 47,666 34,397 1.8% 8,715 $4.50

Tultitlán 1,688,133 100,030 72,759 4.3% 30,526 $4.73

Vallejo-Azcapotzalco 454,485 1,450 35,779 7.8% 2,000 $7.85

Mexico City Metro Area 10,404,644 358,329 559,948 5.1% 165,013 $4.16

ECONOMIC CONDITIONS EMPLOYMENT BY INDUSTRY According to the Bank of Mexico, the economy is facing risks that might generate negative effects on the growth. Most important Mexico City, June 2019 elements of risk both internal and external are valid and reflect a low risk of bias such as: 1. a delay in the implementation of the USMCA that affects investment. 2. the uncertainty may cause companies to 6.1% postpone or not carry out their investment plans or consumers reduce 7.1% their expense, 3. a increasingly negative external assessments for 9.2% Pemex that complicates its financial situation or downward revisions from credit rating agencies for other State’s manufacturing companies, 46.9% 4. new damages to the production or distribution of goods and 10.2% services. There are also factors that may have a positive influence such as: 1. the conclusion of the USMCA, 2. greater dynamism in the industrial production of the US, and 3. a revitalized aggregate demand, 20.4% as a result of a larger expense of consumers or a increase in Source: Department of Labor investments of some productive sectors. General Services (Financial, Social & Leisure) Retail Manufacturing Trade / Transportation / Utilities

UNEMPLOYMENT RATE EXCHANGE RATE

Annualized Mexican Peso (MXN) vs US Dollar (USD)

7% $22.00 5.6% 6% 5.0% 4.7% 4.7% 4.6% $21.00 5%

4% $20.00 $19.41 $18.97 $19.12 $19.20 3% $19.08 3.6% 3.4% $18.73 3.2% 3.3% 3.3% $19.00 2%

1% $18.00 18-2Q 18-3Q 18-4Q 19-1Q 19-2Q $17.00 2018-1Q 2018-2Q 2018-3Q 2018-4Q 2019-1Q 2019-2Q México Ciudad de México Source: INEGI Source: Banxico

CONSUMER PRICE INDEX (CPI) FOREIGN DIRECT INVESTMENT

5.5% Others 4.91% 4.83% Mining 4.57% Electricity and water 4.5% 4.3% 4.10% Inf. Mass Media Financial and Insurance Construction 3.5% Commerce Transportation, mailing Manufacturing 2.5% 18-2Q 18-3Q 18-4Q 19-1Q 19-2Q 0% 10% 20% 30% 40% México Source: Banxico, Annualized Source: Department of Economy 2Q 2019 MEXICO CITY INDUSTRIAL MARKET

INDUSTRIAL SUBMARKETS IN MEXICO CITY AND METROPOLITAN AREA

Far North 1 1 Huehuetoca CCT District 2 Tepotzotlán 3 Cuautitlán 4 Tultitlán Middle North 5 Tlalnepantla 6 Naucalpan 7 Vallejo - Azcapotzalco 2 Southeast 8 Iztapalapa – Tláhuac 9 Toluca (not visible) 3

4 MEXICO STATE

MEXICO 8 CITY

MEXICO CITY JUAN FLORES CLAUDIA MONTOYA DIEGO LEÓN LAOS Espacio Santa Fe Director of Research Market Research Analyst Market Research Analyst Carretera México-Toluca 5420-PH 1 55.5980-2000 55.5980-2000 55.5980-2000 Santa Fe, México, CDMX, 05320 [email protected] [email protected] [email protected] 55.5980.2000

Newmark Knight Frank has implemented a proprietary database and our tracking methodology has been revised. With this expansion and refinement in our data, there may be adjustments in historical statistics including availability, asking rents, absorption and effective rents. Newmark Knight Frank Research Reports are also available at: www.ngkf.com.mx/en/localmarketreports.html

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