Madrid office market back to 2002 'dot-com crisis' levels, says Savills

The Madrid office market is back to 2002 trading levels, with a 50% decrease in leasing transactions over the summer months compared to 2007, and yields on the increase, according to international property services firm Savills.

Although the summer months are characteristically quieter than the rest of the year, only 105,000 m² of office space was leased in Spain during this period. Furthermore, a marked increase of 15% office transactions have taken place in mixed-use buildings within the ringroad, equating to 45% deals signed in these locations. 'This indicates that companies are prioritising lower rents (between 20-25% less) above enhanced corporate image or technical services associated with exclusive office buildings,' the property advisor said.

The overall reduction in demand has reportedly kept levels of supply stable, however the lower levels of take up of vacant space has led to a slight increase in vacancy rates to 6.45%. Although the annual rental increase in Madrid was 3%, differences in performance of prime and secondary are steadily emerging, and rental reductions have been noted in obsolete vacant properties whilst CBD rents are arguably overvalued at EUR 45 m2/month. Market feedback suggests EUR 40-42 m2/month is more realistic.

In the investment markets, akin to other global cities, transactions are notably down due to debt issues and Madrid is no exception with a 45% decrease between January and September 2008 compared to 2007. Although more buildings are up for sale, the buyers that are active have different yield expectations to sellers and whilst the gap is closing, there is still some way to go. According to the Savills report, those that rejected previous offers now face pricing reductions of up to 40%.

Rafael Merry del Val, head of Savills' Madrid, said: 'The uncertainty in the financial markets and the inflexibility in the supply of credit are slowing down the investment market even more. The adjustment has not stopped and we will see levels that were unimaginable only months ago.'