OUTLOOK FRANCE: Paris office market sees easing vacancy levels and incentives

The Paris office market is expected to see a slight recovery in effective rents in 2016 thanks to falling vacancy levels and a subsequent decrease in incentives, according to Richard Malle, head of research France, BNP Paribas Real Estate.

Incentives have risen to historically high levels in Paris in recent years, or an average of 20% in 2014, Malle pointed out. For this year, he is forecasting an average level of 15%. ‘We are seeing a stabilisation of incentives since 2014 but they are still at a high level historically. In 2006-07, the average level of incentives came to 12%,’ he pointed out during PropertyEU’s recent French Outlook Investment Briefing at the Paris office of law firm Taylor Wessing.

While vacancy rates in Paris CBD currently stand at a modest 4.6% - which is close to the long-term rate - they are much higher in outlying areas outside the Ile de France. In the first nine months of 2015, the western business district of La Défense chalked up a vacancy rate of 11.1%, Malle noted. However, this is a significant improvement from 15% in previous years, he added.

‘By the end of 2015 we are predicting a 10% vacancy rate for La Défense.’ He expects this figure to ease further in the next 12 to 24 months to around 8% at end-2017.

Low effective rents
Nevertheless, incentive levels remain high at La Défense, reaching 25% in the first nine months of the year. The high level of incentives has pushed headline rents down to €481 per m2 per year as at 1 October. Overall, Paris offices commanded average headline rents of €381 per m2 per year over the period. This compares to an effective rent of €317 including incentives.

This is an absolute low point, Malle said. ‘If we have a new crisis, there is a relatively low risk of that rents will fall further.’

The highest vacancy rates in Paris are currently in the so-called Western Crescent below La Défense including Péri Défense and Neuilly-Levallois where they average around 13%. Meanwhile incentive levels average around 22% in that area, Malle said. ‘There is a strong correlation between incentives and vacancy rates on the Paris Left Bank and Western Crescent.’

Despite the high vacancy levels in some parts of the city, there is reason for optimism, Malle said. Prime office yields in Paris CBD have continued to fall in the past 12 months to around 3.5% and are expected to drop further to 3.25% in 2016.

Malle is predicting that the overall vacancy rate for Paris offices will drop to 6.9% in 2017 from 7.4% at present due to rising net absorption on the back of modest economic recovery and the low level of new supplies in the next two years due to low building starts in 2013-14. ‘Since July this year we have a seen a recovery in take-up for large offices,’ he said. 'The diversity of the market means that Paris itself is very balanced.'

While Paris has seen its office development pipeline shrivel in recent years, some new projects are making their way to the market, noted Stephen Miles, managing director, EMEA, Capital Markets, CBRE, UK. ‘We’ve seen as many new developments up to Q3 as for the whole of 2014. But a key is that most are pre-let. Outside of that, development remains really challenging. There has not been much spec development outside Frankfurt and London.’

This is possibly due, he added, to the fact that the French development community is heavily supported by the banks.