Victoria Scalogne reports a trend for larger corporates to relocate to the outskirts

lthough 2008 had the most new office space delivered in the Paris region office market since the mid-1990s, a recessionary environment and tight credit conditions since 2007 could lead to a dearth of new supply in the region in two years' time. Third quarter 2008 was the period when the highest net percentage of European banks and financial institutions tightened lending standards since the ECB's Bank Lending Survey began. This period of tight credit will have the most important impact on the completions pipeline at the end of 2011 and beginning of 2012.

According to property and portfolio research forecasts, net absorption will overtake net completions in the Paris region at the beginning of 2011. In the chart, which shows forecast average annual demand growth versus average annual supply growth over the same period for a few European cities, we can see how Paris compares to other European markets.

Some of the largest occupier deals in the Paris region in 2008 and 2009 were motivated by large corporations cutting operating costs by consolidating staff into a single modern office building. These both optimise space per employee more efficiently than older buildings and are cheaper to run; most are located in the outskirts. Grecam highlights that these types of buildings in central Paris at prime rents have not been leased as successfully as the modern buildings in some more peripheral locations, indicating that price is indeed a main driver of these trends.

According to Grecam, around 70% of space under construction in Central Paris and the first periphery is HQE (a standard for green building in France). This number rises to more than 80% outside Central Paris, and 90% of non-speculative buildings under construction or redevelopment are also HQE. Investors, concerned with their green image, have been responding to this increasing environmental awareness.

Large corporate occupiers have also seen the benefits of these buildings in terms of costs and image. Government measures stemming from Grenelle de l'Environnement (a string of national and local government meetings in 2007) will also become more stringent. This poses a problem to the Paris region's growing second-hand space availability as large companies like GDF Suez and Crédit Agricole relocate to new buildings.

Grecam estimates that 70% of the stock in the Paris region constructed before 1970, around 10m m2 (or 20% of the current office stock), has not been redeveloped. Given the increasing occupier preference for modern office buildings that are cheaper to run, growing environmental awareness and regulations, and the dearth of new completions combined with the increasing availability of second-hand stock in the medium term, the result is that the demand and supply in the Paris region office market is likely to be mismatched in the medium term.

Victoria Scalogne is a real estate analyst at PPR

 

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