Post on 16-Dec-2015
Robert G. WATERLANDFRICS
Managing Director Société de la Tour Eiffel
The Paris Office Market in a nutshell
La Sorbonne Paris IVInstitut d’urbanisme et d’aménagement
19th October 2011
London and Paris dominate European office markets
Ile de France: largest market in Continental Europe and Eurozone• Paris : 52 million m²• Madrid : 14.5 million m²• Frankfurt : 12 million m²• Rhône Alpes : 20 million m²• French regions : ± 100 million m²
2
Office development since 1981Development starts
3Source : ORIE
19811982
19831984
19851986
19871988
19891990
19911992
19931994
19951996
19971998
19992000
20012002
20032004
20052006
20072008
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
2009
2010
A history of cycles (highs )The commercial office market developed as a result of the emergence of the service economy from the mid 1960s. Previously offices were owned and occupied principally by state organisations (ministries, post, police) or were ancillary to industrial plantsAverage : 1.2 milion m² deliveries per year but 3 boom periods• 1968-72 : the “Manhattanisation” of Paris (La
Défense, Maine Montparnasse, Beaugrenelle)• 1986-91 : Boom in anticipation of financial
deregulation (big bang), European integration (1992) and lifting of developers agrément requirement
• 1997-01 : Economic recovery. Internet bubble4
A history of cycles (lows )
Intervening busts !• Late 1970s : successive oil crisis• Early 1980s : Mitterrand !• Early 1990s : Economic recession in the
wake of Gulf War• Early 2000s : Burst of internet bubble• 2007 : Subprime – Lehman Brothers
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Emergence of established office development sectors
First stand alone offices were buildings converted from other uses, mostly residential Development market grew from golden triangle to 1. Main line station hubs : Montparnasse, Gare de Lyon,
Gare d’Austerlitz, Gare Saint Lazare2. La Défense (inaugurated 1958)3. Golden crescent – brown field sites following
disindustrialization4. Other inner suburbs on public transport routes (Saint
Denis, Montreuil)5. Outer suburbs and new townsWestern sectors however have constantly held a dominant position 6
Planning and licensing• The administration strove to channel development by a
number of tools and the authority of the DATAR* – developer’s “agrément”, – occupier’s “agrément”, – “redevance bureaux”, – annual office tax
to counter concentrations and an imbalance in offices between East and West
• It also set an example : Banque de France, Marne la Vallée - Ariane Espace, Evry - Ministry of finance, Bercy – Caisse des dépôts, Paris Rive Gauche
• Over the years, these artifices have been relaxed with no real detrimental effect on geographical market balance
• Developer’s “agrément” however remains a decisive tool in the regulation of office development in the Region and the quest for parity with residential 7* Délégation interministérielle à l’aménagement du territoire et à l’attractivité régionale
The occupational marketMain office sectors as defined by Immostat
Source Immostat / Jones Lang Lasalle
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Paris Centre West
Southern Paris
North-Eastern Paris
La Défense
Western Crescent
Inner Rim
Annual global take up
Gross take up (million m²)France GNP (%)Global growth (%)
Expected end 2011: + 2 million m²
Source CB Richard Ellis / Immostat / INSEE / FMI
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Madrid :500,000 m²Frankfurt
450,000 m²Brussels
400,000 m²Lyon
200,000 m²
Paris office market performance is generally correlated to global economics
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 110
0.5
1
1.5
2
2.5
3
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
Gross take up (million m²)France GNP (%)Global growth (%)
Expected end 2010: + 2.2 million m²
Annual vacancy ratelowest in Europe
Source CB Richard Ellis
10
ComparableaverageMadrid :
13.0%Frankfurt
15.0%Moscow
17.5%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Q2 2011
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
2.50%
4.00%3.40%
5.80%
5.10%
6.00%
8.30%
5.60%
3.70%
6.20%
6.60%
2.50%
6.20%
5.50% 5.20%
6.60% 6.70%
Paris La Défense Ile-de-France
Wide spectrum of demandTypical breakdown of take-up by user activity
(> 1,000 m² )
Source CB Richard Ellis
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Industrial sector 17%
Other4%
Transport - Logistics - Distribution
12%
Public sector11%
Real estate services5%
Banking - Insurance23%
Legal - Consultancy8%
Communication - Creation
7%
Information technology and communication 13%
Typical annual demand profile of > 5 000 m² by sector
Source BNP Paribas Real Estate
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Demand Supply
Domination of the West
North inner rim
Paris ex CBD
Paris CBD
Western crescent East inner rim
South inner rim
Annual rental progressionNet average rent for prime and/or new space > 1 000 m²
Source CB Richard Ellis 13
Average rent Prime Paris CBD Average rent Prime Western Crescent
Average rent Prime La Défense Average rent new, refurbished, renovated Ile-de-France
Current letting market
• Market weakness due to global economic environment rather than intrinsic supply and demand equation
• Positive GDP growth superior to 2% pa required to absorb unemployment in the service sector and increase office demand
• Despite respectable level of transactions, 2 million m² per year, negligible net absorption of stock
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Consequently
• Immediate supply : 3.65 milions de m² / 7.0 % vacancy rate
• Downward pressure on rents• Substantial landlord concessions on leasing• Dichotomy : prime/secondary
new/second hand• Should be noted that of 52 million m² overall stock
probably 35% occupied by administrations that is never transacted (viz. vacancy rate)
• Tenants have been able to renegotiate passing rents which has helped limit vacancies
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However new supply pipeline is drying up
Source BNP Paribas Real Estate
16
French office development pipeline
Speculative
Pre-leased
millions €
943
254
0
500
1 000
1 500
2 000
2 500
3 000
3 500
4 000
4 500
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 S1
584
2 004
Future projects dependent on feasibility and finance
Source Jones Lang Lasalle17
In m²
3T2011 2012 2013 20140
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
121,861 345,884 29,400
103,495
256,274
173,175
65,050
85,749
1,525,065
459,786
Potential deliveriesBuildings under constructionPreleased area
Current rental values
Source CB Richard Ellis / Immostat
Weighted average rents as at 1st July 2011
Trend compared to 1st July 2010
Comparable prime rents
London € 1 120Madrid € 320Frankfurt € 400
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New / renovated Second handParis Centre West € 535 é € 404 éSouthern Paris € 442 é € 340 éNorth Eastern Paris € 309 é € 251 éLa Défense € 480 é € 355 =Western Crescent € 314 ê € 226 êInner Rims € 241 ê € 163 éOuter rim € 164 ê € 110 êAverage Ile-de-France € 306 = € 224 ê
Typical residential rents
Paris Intra muros 300-350 €/m²Western suburb 200-250 €/m²
Pyramid of rental transactions
17%
37%
29%
14%
3%
> 600 € 450 - 600 €
300 - 450 € 150 - 300 €
< 150 €
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Every picture tells a story
Variable sector outlook
• Traditional Paris intra muros market: stable, reduced rents (-30%) rekindle demand
• La Défense : large space takers; highly cyclical both in terms of supply and demand – under pressure!
• Emerging markets : Saint Denis, Boulogne, Montreuil, Issy-les-Moulineaux : weak demand relative to supply, market equilibrium varies
• No real overall change anticipated before 2013, despite low supply inventory. Improvement largely dependent on gradual employment recovery
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Current occupational trends• HQE / green – 11% of available supply• Large enquiries invariably motivated by regrouping (60%) and
rationalisation. Centrifugal forces spinning tenants out of the CBD and la Défense:– Lower operating costs– Higher occupational density– Energy efficiency– Move towards horizontal, campus style, space often preferred by new
generation management
But public transport a prerequisite• CBD small lettings dominate• Second hand space partially recovering thanks to rental adjustment• Rental renegotiation on existing leases largely over but could reappear• 93% of enquiries are for leasing as opposed to acquisition• For larger transactions, negotiation periods trending outwards (450
days average)21
Future occupational trends
• Flat market dominated by tenant rotation with limited future growth until 2013/14
• Cost cutting and rationalisation will continue to be key drivers for demand
• New developments to remain targeted by tenants leading to shortage in some areas
• Gradual reduction of landlord concessions – balanced market in terms of supply and demand
• Horizontal versus high rise!22
Not forgetting Grand Paris
ProjectFast undergroundTram-trainTramUndergroundExpress road
Presidential projectEconomic or urban pole
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Grand Paris
• Ambitious project to create international metropole capable of rivaling New York, London Shanghai and Tokyo – Presidential initiative
• Creation of economic poles around Paris with comprehensive interconnecting transport links
• Timing 2009-2025• Finance ? : €30-35 billion• Political ramifications – opposition parties against• Little if any discernable influence on market as yet,
except for indirect tax hikes. Sustainability a far more relevant issue.
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The investment market
• Largest city market in Eurozone• Created by the British investors and their
advisors in the 1970s• Over the years structural changes have helped to
develop and improve the market– Registration duties reduced from 20% to 5% late 1990s– Longer leases– SIIC regime (2004 – equivalent REIT)– Deregulation of occupational market (agrément)– Increased professionalism:
• Chartered surveyors• Due diligence• Advisory• Benchmarking
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The investment market
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Investment in French offices since 1992
Sour
ce K
eops
Speculative bubble spurred by leverage
In €bn
estim
ated
Investment market trends
• Severe impact of world financial crisis, notably lack of liquidity
• Value adjustment more rapid than previous crisis• Following falls, values now stable• Low volumes centred on core properties (risk
aversion)• Lack of financing limits lot sizes (Bâle III
exacerbates)• Limited evidence of distressed sales• Anticipated orderly work out of defaulters by banks
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1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Q12011
0%
2%
4%
6%
8%
10%
12%
Prime office yield Paris CBD
OAT TEC 10 (half-year average)
Euribor 3 months (monthly average)
Yield pattern
28Source CB Richard Ellis
4.75%
3.69%
1.18%
Typical office yields
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Prime offices 4.65-6.00 %La Défense 5.75-6.75 %Western Crescent 5.25-8.75 %Outer suburbs 6.75-12.00 %Regions 6-8 %France retail 4.5-9.0 %Prime Logistics 7.15-8.00 %
Investors
Large panel of players both national and international:• Insurance companies• SIICs• Private funds / family offices• OCPIs• Pension funds• International (German, UK, US, Spain, Italy, Korea,
Middle East, etc…)• Currently French insurance companies and
international family offices dominate the market driven by identifiable yield and long term capital growth considerations
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Developers
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•Bouygues•Nexity• Icade•Vinci•HRO
•Cogedim
Agents and advisors
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• BNP Paribas Real Estate (nb DTZ)
• Savills
• Keops (nb UFG-Colliers)
• CBRE• Cushman & Wakefield
• Jones Lang Lasalle (nb King Sturge)
Concentration is the order of the day
Associations• European Real Estate Association• Fédération des Sociétés Immobilières et
Foncières• Institut de l’Epargne Immobilière et Foncière• Royal Institute of Chartered Surveyors• European Goup of Valuers’ Association TEGOVA
• IPD
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