Political Protests Take a Toll
On Reforma Area in Mexico City

Upscale Paseo de la Reforma, the boulevard that runs through the heart of Mexico City past some of its priciest and newest office towers, until recently was blocked by protesting supporters of the losing leftist presidential candidate.

The question for area landlords is whether the disruptions -- and possible continuing unrest following Mexico's contested July election -- are simply a short-term headache, or a broader setback that could damp rising investor demand for the city's and country's commercial real-estate market.

"The risk profile of Mexico has risen a notch," says Kenneth T. Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley. "The specter of old Mexico has been raised."

Before the divisive political environment surrounding the election, investors had been impressed by the country's transition to democracy as well as a rising middle class and stabilized economy -- a marked shift from Mexico's historical struggle with poverty and high inflation.

Foreign investment in Mexican real estate this year is expected to rise as much as 15% from a record $1.1 billion last year, says Victor M. Lachica, president of Cushman & Wakefield Mexico. Mexico City attracts about a quarter of those investment dollars.

The city's office market finally has worked off a glut of oversupply in recent years, with vacancy rates for high-end buildings falling near 15-year lows to 9.1% in the second quarter, says Agustín Alvarado, president of CB Richard Ellis Mexico.

Meanwhile, he adds, many of the region's older and obsolete manufacturing warehouses are being converted to modern distribution centers to serve the area's large and growing population.

The quality of the area's office and warehouse buildings has improved. HSBC Holdings PLC's Mexican subsidiary earlier this year moved into a new 32-story office tower. Wal-Mart de Mexico SA invested about $100 million in 2003 to build a state-of-the-art refrigerated distribution warehouse for produce in nearby San Martin Obispo.

There is little doubt the protests have been at least a temporary setback for restaurants and stores in the Reforma area, and have prompted some prospective office tenants to decide against leasing space in the area.

"People are afraid that this can happen again anytime, so I believe Reforma will be affected in the short- and middle-term," Mr. Lachica writes in an email.

Other areas of Mexico City may stand to gain from the Reforma area's losses, but Mexico City as a whole will continue to remain a magnet for businesses, Mr. Lachica adds. At least three U.S. companies have opted to look for offices in some of the city's quieter submarkets, such as Santa Fe and Polanco, he says.

Less clear is how much of an effect the political gridlock could have outside the Reforma area. Gary R. Garrabrant, chief executive of Equity International, a private-equity firm that invests in real-estate companies outside the U.S. and that led the initial public offering of Mexican home builder Desarrolladora Homex SA, says Equity International remains interested in the opportunities in Mexico despite the challenges posed by such emerging markets.

Mr. Garrabrant adds that he believes the influence of losing presidential candidate Andrés Manuel López Obrador is diminishing daily. Mr. López Obrador was narrowly defeated by conservative Felipe Calderón, a former energy minister who has vowed to create a more equal society and crack down on political and drug-related lawlessness.

Others say the full potential of the Mexico City economy and real-estate market could remain unrealized if local authorities' abilities to address important issues such as crime are compromised by their alignment with Mr. López Obrador, the city's former mayor.

If that happens, the city could be at a disadvantage as it competes with smaller cities to the north such as Monterrey. Many of those cities are tackling structural issues to make themselves more attractive to business, says Alejandro Poiré, a visiting professor of political science at the Kennedy School of Government at Harvard University. "It's a matter of opportunities lost."

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