Having seen significant expansion over the past several years, it has become clear that Mexico’s urban and industrial corridors offer growth opportunities for developers of business-oriented hotels and brands. The national economy remains on a stable, long-term trend of post-NAFTA growth and investment, and the media’s focus on peripheral drug-related violence notwithstanding, the vast majority of markets in Mexico remain safe and hospitable to businesses and business travelers alike.
Foreign Direct Investment and Mexico’s Strengthening Economy
Despite a year-over-year loss of 6.6% in 2009, Mexico’s economic recovery took hold during the second half of that year, driven largely by the rising level of exports to the United States. Mexico’s economy grew by 5.5% in 2010 and is expected to grow another 4 to 5% in 2011. This increase in economic activity has been bolstered by strong foreign direct investment, which in 2010 equated to $17.72 billion (USD). Of this total, 59.7% went to the manufacturing sector, while the commerce and financial sectors received 14.2% and 13.8%, respectively.
Figure 1 illustrates the past and forecasted trajectory of foreign direct investment in Mexico.
Figure 1 Mexico Foreign Direct Investment (in Billions of USD)
Source: Secretary of the Economy, ECLAC, and HVS
Annual foreign direct investment in Mexico has grown dramatically since 1995, strengthening a backbone of industrial activity and supporting a trend toward job growth. Structural economic changes, including the privatization of certain industries previously controlled by the government, as well as improvements in road and airport infrastructure, also influenced the rise in foreign direct investment.
As the following examples attest, the automotive industry is one of the sectors in Mexico that benefit greatly from foreign direct investment. In January of 2011, General Motors announced plans to invest an additional $540 million (USD) in its manufacturing plant in Toluca, Estado de México, for the production of two types of four-cylinder motors for vehicles produced mainly in Mexico. Polaris Industries, Inc., a leading manufacturer of ATVs, motorcycles, and other recreational vehicles, expects to complete construction of its new manufacturing plant in Monterrey, Nuevo León, in 2011. Furthermore, in November of 2010, Pirelli began construction of a new $210-million (USD) tire-manufacturing facility in Silao, Guanajuato that is expected to be completed in 2012.
Tourism is another industry that has historically attracted healthy investment from foreign sources. According to the Secretary of Tourism, the private sector invested more than $3.5 billion USD in tourism projects throughout the country in 2010, which was an increase of 19.2% when compared to 2009. The hospitality sector received the lion’s share of the private investment, followed closely by the real estate sector; the remaining investments were divided between the recreation, complementary services, and food and beverage sectors.
Private sector investments, including 17.15% from foreign investors, helped develop 869 projects in 2010, compared to 500 projects the previous year. The United States, Spain, and Canada were the top three investor countries in tourism-related projects. Beach destinations received $1.6 billion USD in investments, the Central Region received $950.31 million, the Northern Region received $570.29 million, and the Mayan Region received $397.68 million. In 2010, private investment in the Central Region increased dramatically, exceeding the previous high set in 2008. We note that while these figures represent a wide variety of projects including small investments by private individuals, infrastructure improvements, and new hotel developments, among others, these figures are a useful indication of the general trend.
Brand Power Potential in Urban Hotel Markets in Mexico
Strong levels of foreign investment in Mexico have brought an influx of business travelers to expanding markets across the country. To put this into perspective, hotel stakeholders need to consider the lodging preferences of these travelers relative to the available supply. The following table provides the approximate hotel inventory of a select number of Mexico’s industrial cities, as well as the percentage of branded versus independent hotels.
Figure 2 Estimated Breakdown of Hotel Inventory in Selected Cities
While well-operated independent hotels will always remain important components of a city’s lodging base, many business travelers seek the security and consistency of product that a brand provides, as well as the benefits accrued from a brand’s loyalty program. Such brand-based assurances include efficient check-in, high-speed Internet access, and a comfortable, familiar, resource-filled environment that allows business travelers to work effectively from their hotel.
Recognizing this demand on the part of business travelers, many major Mexican and international hotel brands are beginning to expand their presence in Mexico’s urban and industrial areas. Still more branded hotels are needed, however, to adequately serve the country’s expanding centers of industry.
One example is San Luis Potosí, a growing industrial city in Mexico’s Central Region. The city supports a diverse mix of corporations including Bendix Commercial Vehicle Systems, Sandoz, Union Carbide, and Grupo Bimbo. Its strategic geographic location along the NAFTA highway is one reason why L’Oreal recently announced plans to construct a $50-million hair-color production plant in the area. Nevertheless, the greater metropolitan area, whose population stands at over 1,000,000, offers only 26 hotels and just under 4,500 rooms.
Compare these figures to San Luis Potosí’s sister city of Tulsa, Oklahoma, which has a similar manufacturing and industrial scope though only a fraction of the Mexican city’s population. To meet demand, the city of Tulsa offers more than 80 hotels and approximately 13,000 total rooms—roughly three times that of San Luis Potosí—and of these, only ten (12%) are unbranded. By contrast, 61% of the hotels in San Luis Potosí are independent, unbranded properties.
San Luis Potosí hosts many large corporate operations, with more scheduled to arise in the coming years, a scenario replicated in other areas of the country with a strong base in commercial, industrial, and manufacturing concerns. This further underscores the need for more hotels in general in many of Mexico’s economic centers and specifically the need for additional branded, business-oriented hotels in these areas. Current development programs include both one-off investments, as well as more strategic portfolio transactions in which developers and chains alike align interests in pursuing more rapid growth. Projects include free-standing assets, as well as hotels constructed as part of mixed-use projects, often anchored by a retail component.
Mexico’s resort destinations already benefit from the availability of a wide variety of branded properties. Now the ground is fertile for the cultivation of a similarly diverse crop of hotels in many of the country’s commercial and industrial centers. With foreign direct investment on the rise and the continued expectation for economic growth in Mexico, numerous development opportunities abound across the country. Investors must carefully weigh the feasibility of a new hotel development against market-specific factors—including existing supply and the kind, level, and price-consciousness of demand. But given the prospects for growth in Mexico’s emerging cities, now is the time for developers to take a serious look at the potential for branded hotels.