Originally published in CRE Real Estate Issues, 1991

Mexico can indeed be the land of opportunity for the '90s. In fact, Mexico reminds me of the United States in 1947. The population is growing at over two percent annually and about 50 percent of the population are under 20 years of age. Economic and political improvements include: renewed capital inflow, anticipation of the North American Free Trade Agreement (NAFTA), a free trade policy, encouragement of foreign investment, improved Job opportunities, and relatively cheap labor. Real estate shortages are now being addressed. Many U.S. and Mexican interests have already decided that the opportunity exists with or without NAFTA. Can one go wrong? Easily if one ignores a prudent approach. My staff and I have been conducting market and feasibility studies in Mexico for over 25 years for both Mexican and U.S. companies. Cities studied include Mexico City and most of the other cities with over 100,000 people. Over this period, I have witnessed a significant increase in mobility, the first modern shopping centers built, the oil boom, and the debt expansion of the later '70s and early '80s. Moreover, I watched in horror at the decline of the Mexican peso from eight pesos to the dollar to over 3,000. In the mid '80s, the peso decline resulted in the loss of over half of the country's wealth and the flight of most of the country's capital.

Unfortunately, I have seen interest rates at over 100 percent and inflation at over 150 percent in a single year. On the positive side, I have watched President Salinas, tighten the economy, privatize industry and the banks, reduce tariffs, eliminate trade barriers to foreign investment, encourage tourism and industrial development, and promote NAFTA.

It is important to recognize that many announced governmental changes are not changes in the law, but rather changes in the current policy or interpretation of the law. Thus, there is always the risk of a change in policy that could make investing in Mexico even more uncertain. It seems very unlikely; however when considering a long term commitment, the risk must be recognized.

U.S. realty firms, real estate developers and investment banking houses, along with others are rushing to make joint venture deals with Mexican firms to get an inside track to the "Mexican gold rush." In my opinion, joint ventures are the way to go in Mexico. One needs local understanding, of not only the markets, but how to get things done. Rules may change, but old customs in Mexico die hard.

Let's examine some of the problems, opportunities and risks.


Anyone who has attempted to obtain reliable market data on Mexico knows that the process is very discouraging. This goes for housing, office space, retail sales, and to a lesser extent, industrial development. What we normally expect in the U.S. and Canada, we can only dream of in Mexico. Moreover, most of the data are of questionable accuracy. Over the years of revolution, oppression and violent monetary fluctuation, the Mexican people have become very leery of giving out information. Even the Census conducted by the government is questionable. It is getting better, because of companies like ours who are developing inventories and generating market data, along with the demands being made by foreign investors for more accurate information.


Mexico is truly exploding. The country is growing at over 2 percent annually and that is likely to eventually rise. Thus, the country is adding over 1,700,000 persons annually. In Mexico City, the population growth accounts for an additional 300,000 persons annually. At five persons per household, this represents a housing need for 60,000 units. Unfortunately, poverty reduces the demand considerably. Nevertheless, the demand would indicate a need for over 20,000 units annually. Combined with the fact that over 50 percent of the population are under 20 years of age, the demand will continue to rise.

The average family size is between 5 and 6 persons.


Approximately 18 percent of Mexico's population is concentrated in the Mexico City area (known as the Federal District). The Mexico City Metropolitan Area has over 15,000,000 persons (not the 22,000,000 persons that we so often hear). Metropolitan Guadalajara and Monterrey currently have 3,244,000 and 2,640,000 persons, respectively. Puebla follows with approximately 1,500,000 persons, while Leon has 1,175,000 persons. The balance of the cities have population below one million persons. Nevertheless, there are over 20 cities with over 250,000 persons.

Income data in Mexico are very suspect. The census reports income by socio-economic level (i.e., A,B,C,D,E, and so on, A being the highest income, while E low income). The determination is not made directly from census data. The process involves observation and evaluation of housing size, security guards, housing value, number of automobiles, running water, sanitary facilities, general locale and other wealth indicators.

From a developer's prospective, the total population of each city is not really important. Rather, the number of people who have A, B or C income levels is generally the issue. The three levels generally have sufficient discretionary buying power for housing, automobiles, restaurants, shopping centers, discounters, office space, entertainment, banking, travel, and other demands.


Today, many real estate development opportunities in Mexico are the result of recent capital starvation. If the Mexicans had access to capital in the later '80s, many of the underbuilt markets would be fully developed. Because of the many crises, there has been little long-term capital. Thus, developments have been financed with short-term capital expecting a high return. Most developments have been condominiums, where one can recover one's capital relatively soon. Only recently, with the return of American and foreign investors, have we seen longer term financing and developments oriented toward leasing.

Interest rates for short-term capital are currently about 28 percent. In 1990, interest rates were between 36 and 37 percent, if anyone would loan the money. In 1987, interest rates were over 100 percent for very short-term loans.


In Mexico, "key money" is paid for the privilege of purchasing or occupying a space, in addition to the purchase price. U.S. developers and investors are enamored by the large amounts of key money paid for retail and office space. They often believe that the money signifies the strength of market demand and, to some extent, it does. However, in reality, key money is a reflection of risk/return. Along with advance rent, it has been a way for developers to finance developments. Historically, the developer, his family and friends, along with advanced rent, provided the capital to complete a project. Key money and the sale of the condominium units represented recovery of short-term capital. Naturally, this would not be the case in an overbuilt market. Also, long-term financing and a number of new developments will reduce and perhaps eliminate key money.


According to our studies, there is a significant shortage of office space, especially in Mexico City. Most buildings are condominiums. Vacancy is the result of an office condo on the market for sale. Rental units are leased almost immediately.

The lack of capital and long-term financing has limited the number and size of office buildings constructed. Presently, there is an estimated 68 to 70 million square feet of office space in Mexico City. First class space accounts for about
10,000,000 square feet, by our standards. Another 9 to 10 million is classified as first class by Mexican standards. First class office space would rent for between $50 and $60 per square foot, with no tenant improvements or services. Land costs in Mexico are much higher than New York. Generally, land costs anywhere from two to ten times the cost of land in New York City. However, no matter how you approach it, there is a major market for the development of first class office space.

The same is true in Guadalajara and Monterrey, but obviously to a much lesser extent.


In an article published in The News of Mexico City, Sr. Fernando Rius Abud, the head of the National Chamber of Commerce (Canaco) in Mexico, stated that "retail sales for small shoppers goods stores dropped 17 percent last year (1992) and are still declining. Demand can't survive an 11 percent inflation rate. Basic products are the only goods that have shown some growth, while the rest of the market has softened dramatically." Sales of basic goods, according to Canaco, increased 26 percent in 1992. Basic goods include food, drugs, liquor and eating and drinking. One of the best kept secrets in Mexico is the impact that trade liberalization is having upon small retailers.

Overall, Mexico's retail sales grew from an estimated $66 billion in 1990 to $83 billion in 1991, an increase of 25.7 percent. This is in contrast to the U.S. where retail sales were $1,807 billion in 1990, rising to $1,820 billion in 1991. An increase of less than one percent. However, Mexico's retail sales grew by $17 billion, while the U.S. grew by $13 billion. Even given a 12 percent Mexican inflation rate for the period against about 3 percent for the U.S., it's mighty impressive when one considers the countries' differences.

In Mexico, the largest number of people have the least to spend. In fact, while the middle class in growing and income is rising, the greatest income increases are occurring in the high income families extending down to the upper middle income households. Thus, upscale demand is increasing more rapidly than mass-goods demand. Nevertheless, there are far more people in the middle to poor categories.

U.S. retailers are rushing to enter the Mexican market. Wal- Mart has a joint venture with Cifra, S.A. (Mexico's largest retailer) to open Sam's Warehouses (Club Aurrera); Price Club has joint venture with Comercial Mexicana; K-Mart with El Puerto de Liverpool to develop Super-K's, while J.C. Penney and Dillard's department stores are apparently going into Mexico alone. Interestingly, there is significant retail competition in Mexico. However, U.S. retailers have more efficient buying and distribution systems which can result in lower prices. The first Price Club opening in Mexico City set records for the first months sales for both the chain and for the Mexican market.

Shopping centers in Mexico have hundreds of small stores. A typical shopping center of 300,000 square feet usually will have between 200 and 300 small stores. With the development of larger, more modern (air conditioned) competitive retail space, Mexico will begin to experience the demise of the small businessman. Gross margins in Mexico have been much higher than in the United States, because of limited imports, close control of Mexican manufactured goods and the control of distribution.

Melvin Simon and Associates and the Sid Uberman Company have entered into a joint venture agreement with FRISA, S.A. of Mexico to develop three major malls in Mexico City. In Guadalajara and Monterrey, Simon and Uberman have joined Fondo Opcion and Grupo ICA (Mexico's largest construction company) to develop a major mall in each city. The objective is to mix both Mexican and U.S. retailers in the malls. Dillard's and Penney's are expected to be occupants in many of the malls. However, the most significant difference will be that the malls will be leased, rather than the typical condominium arrangements. Mexican retailers are not accustomed to renting, and they certainly do not divulge their sales. Rents and percentage retails, in my opinion, will be a tough sell. Financing will also be provided by U.S. or foreign sources.

The Hahn Company has a joint venture with Grupo Gutas S.A. to develop the 750,000 square foot part of the World Trade Center in Mexico City. Saks Fifth Avenue is reportedly serious about locating a major store there.


Mexico's road structure is poor, especially outside of Mexico City, Guadalajara and Monterrey and in the poor neighborhoods of cities. Most highways are two lane in varying conditions. Mexico does not have an interstate highway system like the United States. There is no gasoline tax in Mexico to finance an interstate system. Instead the Mexican government has entered into an agreement with a consortium of firms to construct toll roads both around major cities and to connect market areas. The program has been a disaster. Tolls for the outer expressway (Periférico) are over $15 U.S. (N$45 pesos). A total of about 1,300 miles have been built, leaving 2,700 more miles to go. Chicago probably has as many, if not more, tollroads than any other U.S. city. One can travel the entire tollroad system around Chicago for under $2.40 (N$7.20 pesos). I am told that one can also drive the entire New Jersey Turnpike for $4.60. Thus, a significant change in the funding of the highway debt must be accomplished before the tolls are lowered or more toll roads are constructed. Needless to say, if one has the money, traveling around Mexico City is much faster on the Tollroad. Recently, while driving around Mexico City on the tollroad, I encountered only five other vehicles. This is incredible given the traffic congestion throughout Mexico City.


The average resident of New York would find Mexico City traffic abominable. In fact, Mexican visitors to New York consider it a drive in the country. Mexico City and Rome residents know the true meaning of traffic congestion. Combined with the worst air quality of any major city in the world, Mexico City, at an altitude of over 7,000 feet, is a challenge for only the hearty. One can rarely go from one location to another by automobile without a substantial delay. In Mexico, traffic congestion is a way of life.


Businessmen in the U.S. and Canada consider the low wages in Mexico a bargain. However, if you think that fringe benefits have gotten out of hand in the U.S., then try Mexico. In Mexico, there are a number of hidden fringe benefits, such as one month vacations, large severance payments (about one year), medical costs, bonuses and others. Thus, often the fringe benefits are equal to or even, in some cases, larger than the hourly wage. Even so, labor costs are less than the U.S. productivity, though it varies depending upon the industry, the job and the city.


Mexico offers many opportunities to U.S. developers. However, the opportunity must be approached carefully. Mexican partners are, in my opinion, a must. Partner selection is even more critical than normal. Partnerships opportunities are usually handled through Mexican lawyers. Integrity, position and business practices are more important than making a deal with an industry leader. Many U.S. firms will become very disheartened over the next five years as partnerships do not live up to their expectations. The Mexican governmental process is slow to move, and is heavily influenced by relationships. Therefore, having the best site, an exciting project, 100 percent pre-leased, financing in place, and general governmental approval, does not ensure a permit to construct. It can be very frustrating. Finally, the opportunity has to be equated to the risk. At the moment, many opportunities exist with less risk than normal. However, the rush to develop in Mexico will, as it did in the U.S. and Canada, overbuild the market, unless some form of constraint is instituted. If you are inclined, select the opportunity carefully, pick the right partners, research the market, target the occupants carefully, watch the currency, and develop the property.