South of the Border: Higher Yields and Growth in Mexican Industrial

In other words, for a similar amount of US revenue exposure, an investor could buy those cash flows for 9x, and 39% cheaper, simply by buying into a non-US domiciled index.

MEXICAN INDUSTRIAL IS BECOMING THE NEW US PORT INDUSTRIAL

Similar constructs and biases exist within real estate markets, particularly with respect to industrial properties in Mexico (as compared with those in the US), which often benefit from US dollar denominated leases and tenancy (the product on which this article focuses).

This analysis begins with a simple, yet bold premise: USD-denominated industrial real estate located in Mexico that houses goods produced in Mexico for US consumption is not all that different from industrial real estate in US port cities housing goods made overseas for US consumption. (Cue the gasps and “clutched pearls” from the institutional investor world.)

There is no doubt that Mexican industrial real estate has unique risk factors and fundamentals that differentiate it from industrial real estate in US port cities (e.g., spotty utilities, less robust infrastructure, and industry concentration in B2B vs. consumer facing products).

However, the similarity and risk profile are closer than one would think at first glance, particularly as Mexico (1) continues to invest in infrastructure and education and (2) absorbs incremental import market share from overseas (China, in particular) in key goods categories.

For example, from 2019 to 2024, “Goods” imports from Mexico increased by 42% as compared with China’s -2.25%, elevating Mexico’s market share of “Goods” imports from 14.5% to 15. 6%.^[2]

Exhibit 1 further delineates the stunning rise of Mexico’s (and decline of China’s) market share of US imports from 2003 to 2024. As of 2024 data, Mexico’s US imports exceed China’s across six of seven “Goods” categories, which, on an aggregate basis, account for around 76% of US imports.

Despite growing 22% cumulatively from 2019 to 2024 and maintaining steady market share since 2019, the only import category in which Mexico market share falls short against China is, unsurprisingly, consumer goods (excluding food and automotive), an area which the Mexican government has expressed a clear interest in scaling and where China’s market share has dropped from 34.2% to 26.6% over the same period.

At a high level, Exhibit 2 illustrates the proposition more clearly. The critical differences are that (1) Mexican industrial real estate is not in the US, (2) the types of goods imported from Mexico for the time being (i.e., fewer consumer-facing products), and (3) Mexican industrial real estate benefits from nearshoring tailwinds, likely at the expense of US port cities.

THE EXPENSIVE WAY AND THE CHEAP WAY TO INVEST IN INDUSTRIAL REAL ESTATE SERVICING THE US

With three-year Mexican sovereign bonds trading at 8.37%^[3] YTM and three-year US treasuries at around 3.87%, on its face the sovereign-debt markets effectively believe Mexican country risk is more than twice as high as the US. However, after adjusting for Bloomberg’s projected cumulative 2.6% MXN/USD depreciation over the next three years, the USD-adjusted 3-year Mexican bond yield is closer to ~7.37%, suggesting incremental sovereign risk premium of ~350 bps for Mexico.^[4]

As outlined in Exhibit 3, transaction data supports the notion that a meaningful risk premium exists between Mexican and US industrial real estate, but the existing spread is empirically too large (see Exhibit 2) and at least partially unjustified. Thus, we believe the appropriate risk premium for Mexican industrial over that of the US lies somewhere between zero and 350 bps.

By comparison, the spread between private Mexican and US industrial cap rates is around 250 bps, or around 100 bps below the sovereign risk premium cited above.^[5] However, cap rates do not take into account projected growth, and Green Street last projected Mexican industrial three-year forward annual NOI growth to be 9.0%, 2.2x that of its US counterpart. Exemplary 1Q 2025 market rent growth of 9%+ and public FIBRA consensus estimates further validate this projection, with a comparable 9% same-store NOI annual growth rate projection for FIBRA Prologis.^[6] However, due to political and macro uncertainty, as well as FIBRA Prologis’ 2025 same-store NOI growth guidance of ~5.5%, we adopt an NOI CAGR range of 5.5-9% in the analysis.

To incorporate growth, we employed a five-year unlevered IRR methodology based on spot cap rates, a CapEx reserve, and projected NOI growth. The resulting unlevered returns are 12.4% for Mexico (at the midpoint) and 7.4% for the US, implying an approximately 500 bps spread, or 150bps/43% higher than the imputed country risk premium of Mexico. As a result, at prevailing cap rates, investors who believe Mexico warrants a full country risk premium could achieve around 150 bps of incremental return as compared with US industrial real estate on a like-for-like basis, with additional outperformance if the country risk premium is not fully warranted.

Whether or not an investor believes Mexican industrial servicing the US is inherently riskier than its US counterparts, the value proposition at spot valuations is compelling. Over time, the country-adjusted spreads should tighten as Mexican industrial continues to outperform the US, investors recognize the attractive risk-adjusted returns of the sector and additional international investors enter the market.

LIMITED OPPORTUNITY IS THE OPPORTUNITY

There are only twenty-two investors with more than one million square feet of owned industrial product in Mexico,^[7] the top five of which control around 55% of the country’s industrial stock.^[8] In contrast, there are around seven hundred investors of similar size in the US (>1 million square feet), and the top five owners are far less concentrated with 22% market share.^[9] The dichotomy of ownership concentration of industrial product between the two countries highlights both (1) the limited institutional interest historically in Mexican industrial and (2) the opportunity for additional competition; after all, how much longer can the global investment community ignore Mexican industrial’s higher cap rates and outperformance versus the US (historically and projected for 2025+)?

With relatively few institutions investing in Mexican industrial, it’s not a surprise that fund flows to the sector are historically slim compared to the US. Interestingly, US industrial-dedicated public and private capital raised in 2024 was ~18x that raised for Mexican industrial, which, coincidentally, aligns with the ~18x ratio of US industrial stock to Mexico’s by square footage. Given the attractive fundamentals and investment profile of Mexican industrial, this is a surprising finding as we would expect to see investors begin to overweight the sector relative to its US counterpart. However, upon further dissection of the data, private markets in isolation exhibit “green shoots” of recognition, as 2024 private capital fundraising dedicated to Mexican industrial increased 114% from $377 million to $810 million, signifying the largest annual fundraise proceeds since 2018 and one-sixth of the private capital raised for dedicated US industrial funds in the same period.^[10]

Despite the prevailing notion of the investment community that US industrial is more desirable to comparable product in Mexico, the data suggests otherwise.^[11]

As demonstrated in Exhibit 4, while Q1 2025 vacancy in both the US and Mexico increased from their respective three-year trailing averages, Mexican industrial vacancy of 4.4% remains 190 bps tighter than in the US, with 600+ bps higher year-over-year market rent growth. With respect to each country’s industrial development pipelines, Mexico’s under construction pipeline as a percentage of supply is nominally high as compared with the US (15.6% vs. 1.6%), but after adjusting for pre-leased space and the last twelve months of absorption in each geography, the Mexican supply pipeline represents only 1.3 years of supply as compared with 1.6 years for the US. Assuming Mexican industrial demand holds, it should have a more balanced supply-demand setup going forward.

Due to nearshoring tailwinds driven by a litany of trends reshaping global logistics, we believe Mexican industrial will continue to outperform, primarily as industrial supply chains serving the US prolong their shift from overseas to North America. In concurrence with this conclusion, market participants similarly anticipate accelerated demand for Mexican industrial, with Ares, for example, projecting that Mexico could absorb 5-10% of trade market share from China over the next five years, which, in tandem with healthy US consumption growth, could result in 50–65 million square feet of incremental industrial demand over the next five years. This quantum of demand would account for approximately 8% of existing stock in addition to already strong absorption levels.^[12]

THEMES & STRUCTURAL SUPPORT FOR BROADER MEXICAN INDUSTRIAL DEMAND

Introduced in January 2025 in collaboration between Mexican government and the private sector, “Plan Mexico” is a six-year strategy intended to promote economic & industrial growth in Mexico. One of the express goals of the plan is to compete against China.

Select goals of Plan Mexico relevant for industrial real estate include:

Electrical Infrastructure: Increase electricity generation capacity by 22k megawatts via the construction of 86 new substations and 63 substation expansions

Foreign Direct Investment: Attract US$100 billion annually of foreign direct investment

Value Chain Growth: Expand national contributions to global value chains by 15% in industries such as automotive, aerospace, electronics, pharmaceuticals, among others

Expansion in Consumer Goods: Drive 25% expansion in consumer goods production, with a focus on areas of historical China market share hegemony, such as toys, textiles, footwear, etc.

Accelerated Depreciation: Allow for immediate depreciation for new investments on incremental fixed assets

Education Incentives: Introduce incremental 25% deduction on additional spending for worker training programs and double the number of dual education programs

The Plan Mexico agenda is a significant boon to Mexican industrial real estate investments, specifically as it addresses many of the key concerns and risk factors of investing in the country.

In addition to Plan Mexico, other themes also have and should continue to play a significant role in fostering additional industrial growth in Mexico, as follows:

Affordable Labor and Logistics: Mexican wages are 16% cheaper than China’s, and Mexico–California shipping is around 8x cheaper than China–California, and takes eleven fewer days.^[13] In addition, Bloomberg expects the Mexican peso to depreciate against the dollar by 3.0% over the next two years, as opposed to 2.6% appreciation in the Chinese yuan, enhancing the Mexico value proposition.

Free Trade Under the USMCA: While goods from Mexico qualifying under the USMCA remain largely tariff-free, both the first Trump Administration and Biden Administration maintained tariffs of 19% against Chinese imports, which have since increased to 30% under an agreed détente in May 2025. Given bipartisan support for both the USMCA and Chinese tariffs, Chinese goods may have an added surcharge over Mexican goods for the foreseeable future, supporting Mexican manufacturing.^[14]

Growing Foreign Direct Investment: FDI into Mexico surged since the COVID era, as stymied supply chains highlighted the need for nearshoring logistical infrastructure and manufacturing. From 2019 to 2024, FDI into Mexico increased by 51% and an 8.6% CAGR.^[15] Included in this data are significant investments by flagship US industrial tenants, such as Amazon and Walmart, who have made additional announcements of further FDI into Mexico going forward.

Young and Growing Population: The median Mexican age is not only lower than China (31 in Mexico compared to 40 in China), but also has a more constructive growth trajectory capable of supporting a younger and growing workforce.^[16] According to Oxford Economics, Mexico’s population has a long-run growth rate of 0.6%/year as compared to China’s negative 0.4%/year.

THE MATH CHECKS OUT

From an analytical perspective, Mexican industrial real estate is a compelling alternative to US industrial, as prevailing valuations and growth trajectories support returns that are not only in excess of what is achievable in the US but also the perceived country risk premium for Mexico. Despite Mexican industrial’s outperformance and accommodative secular tailwinds, there are relatively limited investors in the space, which is likely to change as outsized economics entice new entrants into the market.

These returns, however, are predicated on capturing meaningful rent and NOI growth. Aside from blockbuster growth achieved in recent years which support the feasibility of such assumptions, several prevailing trends should continue driving the market forward, chiefly (1) decoupling from China/Asia and deglobalization in general; (2) catalyzed by the COVID era, a general desire to nearshore manufacturing for defense, logistical control, cost savings and, now, tariff savings purposes; (3) the durability of the USMCA, through which most goods that qualify remain tariff-free; (4) Mexico’s domestic focus and investment in replacing overseas nations that presently import cheap goods to the US; and (5) US aversion to additional inflation, which requires goods to be manufactured in geographies with inexpensive cost inputs.   Of course, if Mexican industrial turns out to serve the same function as industrial real estate adjacent to US ports, the outsized growth and country risk premium should become less relevant.

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Note from the Editor: Issue #19

Mid-Year Pulse: Global Investors on the Economy, Energy, and Housing

Benjamin van Loon | AFIRE

Bend, Not Break: Investing in Real Estate Amid Economic Uncertainty

John Murray + François Trausch + Russell Gannaway + Kirill Zavodov | PIMCO

Test Of Time: How US Real Estate Withstands an Uncertain Investment Market

Riaz Cassum | JLL

Oh Canada: Why International Investors Might Want a Second Look at Canadian Real Estate Markets

Amy Erixon + Long Tang + Daniel Goldberg + Marie-France Benoit | Avison Young

Beyond Oil: Why Gulf Family Offices Are Doubling Down on US Logistics, Data, and Housing

Abbas Hashmi | Saudi Family Holdings

South of the Border: Higher Yields and Growth in Mexican Industrial

Shaun Libou | Raymond James

Migration Myth: NIMBYism and Why Coastal Movers Aren’t Affecting Sunbelt Housing Supply

Donal Warde | Consultant + Ron Bekkerman | Constellation Data Labs

Machine Center: The AI-Driven Transformation of Data Center Investment

Sam Chandan | Chen Institute for Global Real Estate, NYU Stern School of Business

AI in Commercial Real Estate: A Practical Guide for Industry Leaders

Armel Traore Dit Nignan + Shaarvani Kavula | Principal Real Estate

Artificial Control: Are You Ready for AI Management and Oversight?

Marie-Noelle Brisson + Michael Savoie | CyberReady, LLC

Capitalizing on Dynamics: Demographic Mega-Trends Impacting CRE

Stewart Rubin | New York Life Real Estate Investors

Mid-Cap Assets: An Under-Examined Segment in CRE

Asaf Rosenheim | Profimex

The Lifestyle Renter: A Growing Opportunity for Strategic Investment in High-Quality Apartment Communities

Hannah Waldman | The Dermot Company

The Climate Is Speaking: CRE Underwriting for a Future That’s Listening

Ines Diez + Thomas Stanchak | Stoneweg

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