Nearshoring in Mexico: Real estate challenges

As a result of China’s COVID-19 restrictions, semiconductor shortages, and the global supply chain crisis, Santamarina + Steta has received multiple requests from U.S. and Canadian companies to provide legal advice and support on how to establish new manufacturing facilities in Mexico and even relocate manufacturing activities from China and Southeast Asia to Mexico.

Despite the many advantages of relocating to Mexico, such as preferential tariff rates under the USMCA, labor costs, and the undeniable proximity to the United States and Canada, moving from one side of the world to the other can be more complex than expected. 

From a strictly real estate perspective, and in addition to any assessments relating to areas such as security, skilled labor and tax strategies, in this article we have attempted to identify the main real estate aspects to consider when relocating manufacturing activities to Mexico:

Geography of North America. The U.S., Canada, and Mexico have coastlines on both the Atlantic and Pacific Oceans, and the U.S.-Mexico border runs from coast to coast. However, the decision on where to locate a manufacturing plant in Mexico will need to be influenced by the market or region that the plant will serve.

For example, while locating a manufacturing plant in Ciudad Juarez, Chihuahua, may be a good idea for supplying goods to Texas, there may be better options for exporting to other countries. Similarly, while relocating to Tijuana or Mexicali would be the best option for supplying the California/Arizona markets, there may be better alternatives for supplying goods to the Northeast US/Canada or Europe. Likewise, the Yucatan Peninsula has become a top destination for multinationals due to its proximity to Florida.

Availability of properties. Since the phenomenon began nearshoring, it has become clear that although Mexico has world-class industrial parks along the U.S.-Mexico border and in other industrial cities, Mexico was not prepared to receive the wave of new companies interested in establishing facilities closer to the U.S. and Canada.

Fortunately, land in northern Mexico is not extremely limited and real estate developers have the capacity to serve new clients. However, this would typically mean that new companies would have to wait for real estate developers to build new industrial facilities or would have to invest additional resources to acquire and build their own facilities in Mexico.

To speed up this process, many of our clients have opted to sign “build-to-suit” agreements (“built-to-suit agreements”) with Mexican companies.

Infrastructure and transportation. Although there are significant areas of land to be developed in Mexico, it is important that the chosen location is well connected via roads, railways or nearby ports, in order to simplify logistics and reduce transportation costs and risks.

Availability of water and services. An additional issue our clients have considered has been whether the desired location has the capacity to provide them with the services and resources necessary for their processes.

For example, since industrial activities can have a high demand for water, it is crucial to locate new facilities in areas where there is sufficient capacity to support the exploitation of water by new companies, without being overexploited. The previous ones, as overexploited aquifers, are often subject to prohibitions on the issuance of new water concessions. Therefore, the supply of water can be more expensive. In this sense, while northern Mexico has problems with extreme drought, other regions have enough water to serve the new players.

Another issue under consideration is the capacity of the area's electrical grid and the existence of Natural Gas/LP Gas pipelines in the area.

Incentives and permitsWhen deciding on the location of a new facility, it is relevant to consider whether the Federal and State governments offer incentives for the investment to be made, as well as the permits, licenses and authorizations required to start operations of the manufacturing facilities and to keep them in compliance.

Relocating to Mexico has proven to be a viable and cost-effective option for many companies. However, it is essential to conduct a thorough assessment of how, where and when to relocate.