Sarkozy’s Paris Skyscraper Vision Clouded by Europe Debt Crisis

Paris’s Praetorium, a seven-story office building that opened in 2009, was hailed as the first step in President Nicolas Sarkozy’s plan to revitalize the city’s La Defense skyscraper district. Today, it’s still empty.

No companies were willing to lease the entire 10,000 square-meter (108,000 square-foot) building even after the rent was cut by 12 percent. The owner, Capital & Continental, is trying to find renters by offering smaller units.

Sarkozy’s plan to transform the skyline west of central Paris with bigger, energy-efficient office towers faces new hurdles as the euro-region’s sovereign debt crisis chokes off financing for development and discourages companies from making costly moves. Two tower projects have been abandoned and some of the district’s biggest tenants are moving to less expensive areas of Paris and favoring low-rise developments.

“There will be others that fall by the wayside,” said Patrick Leniston, head of France for building consultant EC Harris LLP. “There are redesign requirements on a number of towers and developers need to stop just going for the image and start talking to end users.”

Started under President Charles de Gaulle in 1958, La Defense grew into a hub for big corporations unwilling to pay for large offices in central Paris, where prime rents are a third higher and most new buildings must have a height of no more than 37 meters (121 feet).

La Defense is about 4 kilometers (2.5 miles) from the Arc de Triomphe. About 170,000 people work there, mostly in about 70 office towers, and large occupiers include Societe Generale SA (GLE), France’s second biggest bank, accountant Ernst & Young LLP and Total SA, Europe’s third-largest oil company.

Steady Returns

The best offices in La Defense had a capitalization rate, or annual rental income as a proportion of a building’s price, of about 6 percent in the third quarter, little changed from a year earlier, BNP Paribas Real Estate said. That compares with rates as low as 4.5 percent in Paris’s central business district near avenue des Champs Elysees.

When Sarkozy announced his 10-year plan in 2006, he said about 17 buildings in La Defense were “unmarketable.” At the time, about a sixth of the buildings hadn’t been renovated in the 30 or more years since they were built, according to a study by Ernst & Young.

The renovation plan aims to help Europe’s largest purpose-built business district compete with London and other cities in attracting multinational corporations. It allows developers to demolish obsolete buildings and replace them with new ones that are as much as 40 percent larger. The plan ties in with a 32.5 billion-euro ($44.5 billion) program of subway track upgrades and new line construction through 2025 for Paris, the world’s second-largest office market after Tokyo.

European Competition

“What’s at stake is the capital’s ability to compete within Europe,” Sarkozy said when he announced the plan. French Minister of Economic Recovery Patrick Devedjian said the Praetorium building was the first step toward realizing the plan at the opening ceremony in October 2009.

That year, Sarkozy’s 23-year-old son Jean dropped a bid to become chairman of EPAD, the planning board for La Defense, following protests that he wasn’t qualified.

In July, Assicurazioni Generali SpA (G) abandoned plans to construct a 50-story building in the area as it approached a deadline to start construction without having secured a tenant commitment or an investment partner. Italy’s biggest insurer may plan a smaller building or sell the site, said Philippe Depoux, Generali’s head of French real estate.

“Launching a speculative 90,000 square-meter tower costing several hundred million euros wasn’t something the group wanted to do at this moment in time,” Depoux said by telephone.

Shelved Projects

It was the second tower project scrapped since Sarkozy announced the plan. In March 2010, the 71-story Signal Tower designed by Jean Nouvel to symbolize the district’s regeneration was abandoned because Spanish developers Medea SA and Layetana Desarrollos Inmobiliarios SA were unable to finance the project.

A dearth of large new leases in the financial district means lenders have little indication of the rents they might get for new and refurbished offices. That adds to their reluctance to finance projects with no tenant lined up.

“We’re staying away from speculative developments at present and this is also true for La Defense,” said Roland Fuchs, managing director for France at Landesbank Hessen-Thueringen Girozentrale, or Helaba. The bank has loaned about 2 billion euros backed by French real estate.

Weakening Economy

The deepening financial crisis in Europe is likely to put pressure on the developers and owners that are proceeding with plans to deliver about 300,000 square meters of new or refurbished office space in La Defense by 2014. Most have restarted projects that stalled in the 2008 credit crisis, only to find the French economy weakening again. La Defense office values have fallen 17 percent since the end of 2007.

The projects are expensive to start and difficult to change, said Eric Mazoyer, managing director of Bouygues Immobilier, which is contracted to build two of the new towers in La Defense. Developers can spend as much as two years and 10 million euros on planning before breaking ground.

“You don’t throw that in the garbage can from one day to the next,” he said in a telephone interview.

Comparatively expensive construction in La Defense means high rents are needed for a project to be profitable. That’s at odds with efforts by large tenants to cut rent costs and concentrate operations on single sites, said Fuchs at Helaba.

Cheaper Projects Favored

Investing in less expensive buildings in areas with lower average rents is “more attractive as a way of diversifying risk and reducing costs both for the developer, the investor and the bank,” the banker said.

Vacancies in La Defense fell to 5.7 percent in September from 5.8 percent a year earlier, BNP said. That compares with a rate of 17.4 percent for offices in the areas bordering the district.

Tenants agreed to rent 59,000 square meters of space in La Defense in the first half, about two thirds of the average for the past decade, according to BNP.

Some of the district’s largest tenants are moving to cheaper locations in the Paris area and favoring groups of low-rise buildings. They include computer services consultant Atos (ATO) Origin SA, Vivendi SA (VIV)’s SFR mobile phone operator and Credit Agricole (ACA) SA’s investment bank.

“We just don’t like towers,” Vianney Elziere, SFR’s head of property, security and general affairs, said in a telephone interview. “It’s a vertical way of working that doesn’t allow interaction between staff.”

SFR plans to break ground next month on a 220,000-square-meter campus near the Stade de France soccer venue in the St. Denis suburb. It will relocate 8,500 employees spread across four sites including the 1970s Sequoia Tower in La Defense.

Campus Trend

Credit Agricole, France’s third-largest bank by market value, also began moving 9,000 of its Paris workers to a campus on an 8-hectare (19-acre) site in Montrouge in November and in 2014 its investment banking division will leave La Defense.

“There is a trend to campus sites, but it doesn’t suit all company cultures,” said Leniston at EC Harris.

Suez Environnement SA (SEV) leases 42,000 square meters in Fonciere des Regions (FDR) SA’s CB21 tower in La Defense and has moved 6,000 workers spread across 15 sites into a single building.

For now, the majority of projects are proceeding because of the shortage of modern space in La Defense. Aviva Plc (AV/) and Credit Agricole’s Predica life insurance unit plan to open the new 45,000 square-meter Carpe Diem tower late next year. It will be first skyscraper built under the Sarkozy plan.

“It’s a counter-cyclical bet on a market to create value,” said Joelle Chauvin, Aviva’s head of French real estate investment.

D2 Tower

Demolition is under way for the D2 tower backed by Societe Generale’s development arm. Unibail-Rodamco SE (UL) is on site to commence its Majunga building, while Carlyle Group LP plans to break ground on its 82,000 square-meter Air2 tower next year. Renovation and refurbishment work is taking place at towers owned by Caisse de Depot et Placement du Quebec, Kanam Grund KAG, Icade (ICAD) SA and Allianz SE. (ALV) At least five other new towers or refurbishment projects are planned for the longer term.

“You have to wonder about the market’s ability to absorb all this supply,” said Ludovic Delaisse, a partner in charge of Paris office leasing and development at Cushman & Wakefield Inc. Delivering the new space at the right time will be critical for owners and developers to profit, he said.

Since most of the projects are scheduled to be delivered during the next three years, competition for tenants will center on rents, tenant incentives and service charges, said Olivier Wigniolle, head of Allianz’s French real estate investment arm.

‘Question of Rent’

“There is demand, but it’s a question of rent, which lies at the heart of it,” he said in an interview.

Allianz is removing asbestos from its Athena Tower and plans to start renovation and refurbishment next year. The company wants to lease the building at 520 euros a square meter when work is completed in early 2014. That’s 20 percent less than Beacon Capital Partners LLC’s First tower.

Average prime rents in La Defense will probably end the year little changed at about 570 euros a square meter before tax, incentives and service charges, BNP predicts. With tenant incentives, the actual rent collected is as much as 20 percent lower, Cushman estimates. Rents in the Paris region increased 3 percent in the third quarter from a year earlier.

While few doubt that President Sarkozy will leave his imprint on La Defense, just as predecessors Charles de Gaulle and Francois Mitterrand did before him, it may not be as ambitious or as grandiose as he envisioned.

To contact the reporter on this story: Simon Packard in London at packard@bloomberg.net

To contact the editor responsible for this story: Andrew Blackman at ablackman@bloomberg.net.

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