June began with the application of new regulations both nationally dictated by the Ministry of Health with the Technical Guidelines for Sanitary Safety in the Work Environment, and at the capital level where the Government of Mexico City published the implementation of sanitary measures to resume activities by sector, including construction. This complementary legal framework dictates the requirements that companies must meet for the safe return to the new normality on the basis of a goodwill agreement where the authorities will verify their implementation with penalties in case of non-compliance, in order to maintain and protect health of workers and the general public.

Under this scenario, the corporate segment must guarantee compliance with the guidelines of healthy distance, the provision of elements of individual protection, the guidelines for the promotion and protection of health, and the application of considerations for vulnerable personnel. The implementation of these obligations and the reduction of the personnel that will now assist the corporate buildings will force companies to resize not only their office spaces but to work under new models where non-core activities can be delegated to other companies. For its part, investment in technology and communication will underpin greater efficiency in neuralgic activities where key personnel will be able to carry out part of their tasks without moving to the corporate ones.

Mexico City is the most important office real estate market in the country, concentrating approximately 90% of the national inventory. With the passage of time, the market has had to evolve in different ways derived from different situations, however, the current challenge is one of the most important it has had in at least the last twenty years. With the Covid-19 pandemic, the challenges it is leaving to this market include the fact that it will have to adapt its spaces to the new normal.

Currently we are witnessing a market that has suffered the effects of the pandemic on all the fundamental indicators of the market, however, the demand as a thermometer of what happens immediately is what allows us to observe the real pulse of the conditions under which It crosses this real estate segment in the capital and in some cities of the country.

According to the data collected by Solili, the corporate market of Mexico City reported a gross demand of 12,082 m² in May 2020, standing at the lowest levels in at least the last 4 years. In an annual analysis, when comparing the demand amounts of May 2020 with those of May 2019, we reported a contraction of 82%. Now, if we compare it with the immediately previous month, that is, April 2020, we see a decrease in demand of 53%.

Despite the fact that in April 2020 the drop in demand for office spaces in Mexico City had been reduced by almost half, during May 2020 the drop was even more pronounced, since only half of the meters that were reported the previous month. This is indicative that as the pandemic has progressed in the country, the situation in the office segment has worsened in terms of demand.

Graph 1: Gross demand for offices in Mexico City in the period January-May 2019 and 2020 (m²).

Source: Solili, June 2020.

Although for now the vacancy volumes have been stable, they have exceeded the demand figures. Analyzing this behavior we have that during the month of May 2020 the net demand of the Mexico City market turned out to be negative, reporting a figure that reaches 7,500 m², an amount similar to that shown the previous month.

During the month of May 2020, the office market in Mexico City vacated a total of 19 thousand m², among the sub-markets that showed the highest volumes were Santa Fe, Bosques, Insurgentes and Reforma. The unoccupied spaces mostly correspond to class A.

We estimate that office vacancy volumes will continue to increase in all of the country's corporate markets, however, we expect that Mexico City will suffer this effect in a more marked way. Until May 2020, move outs has been stable, that is, that similar and even lower volumes have been reported than those reported in previous years, despite this, what we will be reporting in the following months of the year will be an increase in subleases.

Graph 2: Corporate monthly move outs in Mexico City in the period January - May 2020 (m²).

Source: Solili, June 2020.

With the implementation by most of the home office companies, the decrease in the workforce and the financial restructuring that each company is doing, there will be an increase in subleases, which consist of the cession of the use of space or a part of this that the tenant has rented to a new one. Occupancy volumes will tend to decrease in the coming months in Mexico's corporate markets, specifically the largest, such as Mexico City, Monterrey and Guadalajara.

Alternate office markets to Mexico City have also suffered from the effect of the pandemic and demand has decreased. Despite being smaller markets, gross demand has reported decreases of greater proportions even than Mexico City.

During the months of April and May 2020, Mexico City is the office market that has reported the highest volumes of gross demand, which is around 37,700 m². It is followed by Monterrey with 3,100 m², Querétaro with 2,100 m², Guadalajara with 1,803 m² and Puebla with 735 m².

Graph 3: Gross demand for offices in the main cities of Mexico during the month of May 2020 (m²).

Source: Solili, June 2020.

In Monterrey, the transactions that took place between April 2020 and May 2020 were only in existing buildings, the spaces ranging from 48 m² to 823 m². 30% of the transactions have been sales, which are investments in buildings recently added to inventory. The Valle Oriente sub-market remains the most dynamic in the city in terms of demand, since during these months it was the one that concentrated the majority of transactions.

In the case of Guadalajara, the average of the demanded spaces is 200 m², most of which have been for rent and in existing buildings. The brokers who have captured this demand are in Providencia and Plaza del Sol.

Querétaro has despite the fact that it is a market in which the majority of transactions are made for sale, during the months of April 2020 and May 2020 the rental spaces stood out, which represent almost 80% of total demand. The demand has been in existing buildings is located in the sub-market of Centro Sur and Juriquilla.

For the Puebla office market, the demand has been for small spaces that mostly do not exceed 100 m², it has been concentrated in existing buildings located mainly in the Angelopolis sub-market.

The common denominator for now in the markets is that the demand is for small spaces, in existing buildings, due to the low risk that these represent over those still under construction. Office markets such as Querétaro, Puebla and Guadalajara, where demand for sales is strong, has not predominated during the period of April 2020 and May 2020.

In the coming months of the year we will be witnessing an increase in vacancy rates in office markets in the country, which will represent a pressure on prices, which will tend to decrease. Construction volumes will contract due to the uncertainty that will prevail among developers and few new projects will start construction.

Although the scenario for the office market currently does not seem to look positive, there are still elements that can help this market to travel in the near future through more encouraging scenarios, which could be: the increase in coworking demand, flexibility in contracts, the arrival of new companies derived from the increase in the e-commerce segment and the need for companies to recondition their spaces to the new normality, allocating a greater number of square meters for each employee.