South America’s Tallest Tower to Deepen Glut: Real EstateEduardo Thomson
Billionaire Horst Paulmann began developing South America’s tallest tower in 2006, when economic expansion fueled by copper demand pushed Santiago office rents to a six-year high. He’s completing it as vacancies soar.
The retail magnate’s 62-floor Torre Gran Santiago in the city’s financial hub is part of a record amount of office space about to flood the market. Santiago developers, in an effort to fill the new buildings, are sweetening terms for tenants with such perks as six months of free rent, double the norm, or by helping pay for improvements that usually are the responsibility of occupants, according to brokerage CBRE Group Inc.
“The winners will be those that react first and offer incentives to lock in renters,” Marc Royer, director of the capital markets division in Santiago for CBRE, said in an interview. “Some companies are starting to defer their decisions to rent new offices, to see if they can negotiate better terms.”
Office vacancies in the Chilean capital probably will climb to 11 percent in 2014 from a projected 6.6 percent at the end of this year as the flood of newly built space becomes available for rent, according to CBRE. Just two years ago, the vacancy rate was less than 2 percent following a dearth of construction.
About 850,000 square meters (9.15 million square feet) of new space is slated to come to market in the next two years, boosting the city’s office supply by almost a fourth, the brokerage said.
The upscale areas of El Golf, Vitacura and Nueva Las Condes may fare the best as purchases of top-tier, or Class A, office buildings by insurance companies and investment funds, along with postponed construction plans by some developers, stave off rent declines, according to CBRE.
Office landlords in Providencia and downtown Santiago may be less lucky as tenants vacate older offices and move into new developments. In those municipalities, where most new projects are lower-quality Class B buildings, occupancies and rents may fall, said Augusto Rodriguez, who manages about $1 billion of real estate investment assets for Grupo BTG Pactual in Chile.
“The effect will be felt much harder in the B-level office market, where vacancy rates could shoot up to 15 percent,” he said in a telephone interview from his El Golf office. “If there’s an adjustment in rent prices, it will be in the B level, not in the A-level buildings.”
Office buildings that are considered A grade have, among other features, open floor plans of at least 400 square meters and ceilings at least 2.5 meters (8.2 feet) high, and are less than 25 years old, according to Colliers International. Class B buildings have open plans of at least 150 square meters and 2.3-meter ceilings, and are less than 40 years old.
“Those in Providencia, they are the ones in trouble,” said Alejandro Fernandez, a broker at Santiago-based real estate brokerage P&G Larrain.
Fernandez is in charge of renting out the 44,822-square-meter, 22-floor Genesis office building project in the neighboring Las Condes district. The top-tier development, which has yet to move beyond the digging of its foundation, has already found tenants for more than 60 percent of its space.
“I’ve noticed some more people approaching and asking about discounts, but I’m turning them away,” Fernandez said.
This year, a record 18 new top-tier office buildings are scheduled to come to market in Santiago, a city of 7 million, according to Contract Workplaces, an office-space refurbishment and consulting firm. That’s up from 10 last year and five in 2011. Before that, the average was three annually, prior to the surge in development driven by economic growth.
“At a first glance, it may seem too much,” Victor Feingold, regional director at Contract Workplaces, said in an interview at his Santiago office. “But in a healthy economy like Chile’s, you see a migration related to the quality of the buildings. The bigger companies fill in the space of the new premium buildings, because of the status they gain, and the space they leave usually gets filled up by smaller service firms or the companies that couldn’t afford them before.”
Paulmann, the chairman of retail giant Cencosud SA, Latin America’s third-biggest retailer by sales, suspended construction of his Costanera Center project for most of 2009, after the financial crisis the previous year plunged Chile’s economy into a 1.1 percent contraction. Construction resumed as growth returned to more than 5.5 percent a year, propelled by strong consumer demand and rising copper prices.
Gross domestic product expansion in Latin America’s wealthiest country is likely to slow to between 4 percent and 5 percent next year, according to Chile’s central bank. Growth may be as little as 3.5 percent, estimates Vittorio Corbo, senior investigator at Santiago-based think-tank Centro de Estudios Publicos and a former head of the bank.
Aside from the 300-meter, octagonal Torre Gran Santiago tower, Costanera Center also has a 200,000-square-meter shopping mall and three smaller office buildings. The project is coming online in stages -- the mall opened in June 2012 -- while development of the 73,500-square-meter skyscraper and an adjacent 17,000-square-meter office building continues. Construction of two additional 32-floor buildings, which will include a five-star hotel, is planned for future stages.
Cencosud doesn’t have a date set for the Gran Santiago tower’s opening because the company is still working with officials from Providencia -- the tower straddles the border of that municipality and Las Condes, two of the city’s wealthiest districts -- on ways to mitigate potential traffic jams once the tower’s office space is occupied, Cencosud said in an e-mailed response to questions.
“We plan to begin the marketing phase by the end of this year and will have a more precise date for the actual opening by then,” the company said in the e-mail. While there are preliminary agreements with “world-renowned companies,” no leases have been signed for space in the tower, Cencosud said.
Across the avenue from Costanera, at the edge of the Mapocho river, is Parque Titanium, a project with three 23-floor towers that have 53,960 square meters of office space scheduled to come to market next year. One of the buildings will become the headquarters of Empresa Nacional de Telecomunicaciones SA, Chile’s second-largest mobile-phone operator.
The flood of new office space isn’t a concern, said Christian Goebel, executive vice president of Munich-based asset manager GLL Real Estate Partners, which bought one of the buildings in the Parque Titanium project last year for an amount he wouldn’t disclose.
“We have to differentiate by submarkets,” he said in a telephone interview from Munich. “As long as we buy in the best locations, we can reduce vacancy risks. The best markets will always have the best rates.”
GLL, which has invested about $250 million in real estate assets in Latin America, also bought the 21-floor Territoria El Bosque office building in Santiago for more than $90 million in July, according to Diario Financiero. Goebel wouldn’t comment on the figure.
“We like Santiago because it’s a transparent market,” Goebel said. “There’s a lot of liquidity in the local market and Chile provides a transparent and safe legal system.”
With 2.75 million square meters, Santiago, which sits in the shadow of the Andes mountains, has the highest amount of rentable office space in Latin America after Mexico City and Sao Paulo, according to a report from Jones Lang LaSalle Inc. Its vacancy rate at the end of June was among the lowest in the region at 4.1 percent, behind Medellin, Colombia’s 2.8 percent rate and Lima’s 2.5 percent, the brokerage said.
Class A offices in Santiago rent for $18 to $34 per square meter, according to Jones Lang LaSalle, compared with as much as $120 a square meter in Rio de Janeiro, where geographic restrictions limit construction.
In Santiago, rents in the Las Condes submarket were little changed in the first half of 2013 at an average of $31 a square meter. It was the first time in four years that rents failed to rise in the area, a sign of slowing demand, according to CBRE.
Net absorption of new office space in the first half, meaning the net difference in occupied space over the time period, was 59,000 square meters, less than the 67,000 square meters that was added to the market in the same six months, Jones Lang LaSalle said.
New contracts for Class A offices in Santiago may decline in the short term as “more available space will give renters more room for negotiations” by tenants, who are gaining bargaining power, Colliers said in a report on its website.
The increase in vacancies will make it harder for Cencosud to fill the Gran Santiago tower. Doing so may take as long as four years, said Veronica Melys, head of marketing and research for CBRE in Chile.
“On average, a 20,000-square-meter building takes about a year to rent completely,” she said in an interview. “The fact that there still isn’t a definitive date for delivery of the tower may affect potential tenants which are deciding whether to move or not. But, then again, it’s close to El Golf, so there should be demand.”