Inflation in the Real Estate Market

Since 2020, a new stage has been seen in the real estate market as a result of the different realities we have faced globally: the COVID-19 pandemic, the war between Ukraine and Russia, inflation, among others. Due to this, the price increases in construction materials, according to the index of commodities Bloomberg's stock prices have increased by more than 70% in recent years.

Although in 2021 the outlook was not so negative for the industrial real estate market because the increase in activity increased and consolidated thanks to sectors such as logistics, e-commerce, manufacturing and technology, the country managed to position itself as attractive for domestic and foreign companies.

But within this boom, not everything was positive because the construction market was affected by the increase in cost and shortage of raw materials, supplies and long delivery times due to the high demand for these products, a factor that, together with the high demand for industrial spaces, caused an increase in their rental prices.

But not only that, it is important to highlight that the repercussions are not only in the price of real estate, but also in the financial institutions, which have been forced to modify the conditions of their mortgage loans, increasing interest rates, decreasing capacity and even increasing payment terms.

It is also important to consider that, during the construction process of a property, there may be increases in the cost of materials and that this may significantly modify the final budget of the project. With this, the price of the real estate will be defined by the sum of the costs incurred during the entire negotiation and closing process of the project.

However, FIBRAS (Real Estate Investment Trusts) that operate large scale, high quality real estate of different types, become a defensive maneuver in inflationary times since their lease contracts have annual adjustments linked to credits that are adjusted due to inflation.

One of the tools they use is the "lease spread", which is an indicator that compares the variation in the price per square meter of rent of renewed leases with that of expired leases, compared to inflation in the last 12 months prior to renewal.

If you have rising inflation and interest rates, real estate investment trusts (REITs) should protect themselves as interest rates rise and capitalization rates improve.

The way for a lessor or landlord to counteract the effects of inflation on the credit it has on its real estate is to require an escalator clause in a long-term lease to cover any increase in taxes or a substantial change in market conditions.

While the use of the Consumer Price Index or "CPI Index" (published by the Bureau of Labor Statistics, which measures the monthly change in prices paid by U.S. consumers) for annual rent adjustments or increases is a prevailing condition in today's industrial real estate market, in the U.S., the CPI Index is the most widely used index in the U.S. market. American Industries we have sought to offer our clients a balance between the application of this, the increases in construction costs and rental prices in order to achieve a competitive offer in our real estate services.

The main purpose of an escalator clause is to allow lessors to commit to long-term contracts without worrying that changes in external circumstances may harm them.

The area of American Industries Real Estateis always up to date with this information. If you are planning to expand your manufacturing operations in Mexico and are looking for an industrial plant for rent, do not hesitate to contact us.

• Jorge Champion / Industrial Real Estate Commercial Area
• Eduardo Ordoñez / Industrial Real Estate Sales Department
• Mauricio Terrazas / Industrial Real Estate Commercial Area
• American Industries Group

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