The greater Paris market is undergoing a number of structural changes with important implications for investors, writes Antonin Prade
The office market in the Paris region was resisting its weak macro-economic context well until the end of 2012. But since the beginning of 2013, take-up has been dwindling and is approximately 20% lower than last year’s levels (according to Immostat, June 2013), while rents are under pressure.
Beyond the current cyclical downturn, major long-term changes are under way: public transportation infrastructure, tenant needs, technical conception of buildings, and so on.
As a consequence, the sector is tooling up for the future recovery by implementing structural improvements to satisfy end-user requirements. This includes upgrading buildings to higher international technical and environmental standards, offering tailor-made solutions for tenants, and developing alternative markets that offer competitive rents.
Despite slow economic growth, the office sector is undergoing substantial technological change – modernisation of buildings and new environmental standards (materials and architecture). Today, it is unthinkable to construct a building that does not meet energy performance standards. A recently completed building does not stand a chance in the market if it does not meet environmental agency standards. In fact, the percentage of new or refurbished buildings that comply with environmental labels is expected to grow significantly. In 2013, 369 buildings in France and 8% of all office space in the Paris region were certified. In 2015, the certified figure is expected to rise to 17% (according to Savills).
Moreover, older buildings are also starting to undergo sustainable renovation, while tenants are also modifying their consumption behaviour, supported by the growth of green leases.
The recent demand for dedicated campuses and large customised facilities illustrates emerging corporate requirements. In 2012, there were 70 leasing transactions with a total surface area of 1.1m sqm (according to Immostat). See box for some examples.
Other large companies, such as Casino, Thales and Veolia, also have plans to move into customised buildings in the coming years.
In our opinion, large corporations moving to more remote campus-like locations will be a lasting trend. There are a number of reasons for this:
• Real estate cost-cutting, such as more competitive rents, streamlined facilities, controlled charges (partly because they are not high-rise buildings);
• Centralising the company in one site;
• Improved working conditions;
• Supporting the company’s development (internal restructuring, change in corporate culture, modern and ecological image), and so on.
This trend highlights the fact that, for large companies, the office building has become a highly specialised work tool. Designed in advance by teams of professionals, it has become a real resource, a vector of brand image, a driver of team spirit and collaboration.
With this in mind, customised buildings have substantially lower turnover rates than traditional buildings. The companies themselves appropriate the space by realising their own installations: the associated cost is another holding factor.
The geographical structure of the office market is undergoing change. A few years ago, the Paris region was organised around a line running east to west and materialised by the A line of the RER and the 1 line of the metro, with people living in the east and working in the west (Paris CBD, Western CBD, La Défense). Things have changed in the past decade and will most likely continue to do so.
Enhanced suburban transit lines, suburban real estate supply and city traffic congestion are causing end-users to consider alternative locations. This geographical diversification is expected to grow with the implementation of the new regional train loops, which are the pillars of the Great Paris project (€30bn of infrastructure investments until 2030).
Moreover, alternative locations, like Saint-Denis, Saint-Ouen and Clichy in the northern inner rim, Montrouge in the southern inner rim, and Massy in the southern outer rim, are offering significantly lower rents to companies. When cost-cutting is more than a necessity, markets with rents between €250 per sqm and €400 per sqm for brand new buildings are becoming highly appealing to CFOs – especially when the latest office towers in La Défense are marketed at headline rents of €550 per sqm.
Given the above trends, investing in large corporate customised projects might be considered as the next opportunity in the French investment market. Large property sizes,
which might imply a lower immediate liquidity, and more remote locations are offset by their technical advantages and, most of all, by the long-term ties that are forged between the tenant and the property itself.
Antonin Prade is head of real estate research at La Française Real Estate Managers