Paris Office Market Wilts to 10-Year Low as Taxes Crimp SpendingFrancois de Beaupuy
In the heart of Paris’s swanky 7th arrondissement, the 17th-century Laennec hospital is being refurbished to house Gucci-owner Kering SA’s new headquarters.
For Olivier Wigniolle, the chief executive officer of Allianz Real Estate France, which owns the site, the Kering project is a bright spot in an otherwise gloomy Paris office market. Allianz bought the establishment with its two historic buildings and a chapel in 2002 for 82 million euros ($111 million) and is now spending 95 million euros to fix it up.
“Large companies are leaning toward renegotiating leases rather than planning large and costly moves,” Wigniolle said in an interview. “They’re hunkering down to focus on operations since the economic situation isn’t great.”
The office take-up in and around Paris is set to fall by 30 percent this year to a 10-year low of 1.8 million square meters, according to broker DTZ. That’s less than in 2009, when the French economy contracted the most since World War II. A tax burden that’s reached a record high under President Francois Hollande and an economy in its second year of stagnation amid the European debt crisis are weighing on spending decisions.
France’s production outlook slid to minus 16 in November from minus six the month before, numbers released yesterday by national statistics office Insee showed.
“Because of the economic crisis, companies are hesitating to move, are hiring less or even cutting jobs, so demand is much weaker,” Philippe Depoux, CEO of Gecina SA, Paris’s largest publicly traded office landlord, said in an interview. “In 2014, vacancy rates will continue to edge up, demand won’t improve, and rents will continue to trend lower.”
Stay or Go?
Average headline rents for new, redeveloped or renovated space in Paris fell 13 percent in the third quarter from a year earlier to 467 euros per square meter, and leases for second-hand offices fell 1 percent to 396 euros, according to DTZ.
As more companies seek to renegotiate contracts to cut rents, pressure is mounting on landlords and on construction companies such as Bouygues SA whose pipeline for new buildings is shrinking. Bouygues, based in Paris, said on Nov. 14 that commercial property reservations at its real estate development arm fell 41 percent in the first nine months this year.
Demand for new leases has slid between 15 percent and 18 percent from a year earlier, with the decline accelerating since September, said Roman Coste, Managing Director of French agencies at broker CBRE Group Inc.
“Many large French and foreign companies have opted to stay rather than move into new premises because of the lack of confidence in policies and ever-changing decisions” of the Hollande government, he said. “With that kind of politico-economic backdrop, confidence is waning.”
The vacancy rate in the French capital and its surroundings rose to 7.2 percent in the third quarter from 6.9 percent a year earlier, and rents in most non-prime locations in Paris and its environs are heading south. For Paris alone, the vacancy rate was little changed at 4.5 percent.
In the La Defense business district west of Paris -- the biggest office complex in Europe -- the rate climbed to a 9.7 percent in the period from 6.3 percent a year earlier, pushing rents for new and redeveloped space down 12 percent in the period, according to DTZ.
Aviva and Predica’s Carpe Diem tower, which has just been completed, and the Eqho tower redeveloped by Icade are empty.
“Supply is really abundant in La Defense, as well as other markets west and south of Paris,” said Magali Marton, head of research for continental Europe, Middle East and Africa at DTZ.
The situation may remain “rather difficult” next year as 420,000 square meters of new office space that’ll hit the market in the Paris region in 2014 remains to be leased, she said.
In La Defense, Unibail-Rodamco SE is developing the Majunga tower that will add 58,800 square meters of offices, and Societe Generale SA’s insurance unit is set to get the D2 tower with 54,000 square meters, adding to the 327,000 square meters that are already vacant in the district.
La Defense “developments that’ll arrive on the market in 2014 won’t be marketed as planned,” said Allianz’s Wigniolle.
In the so-called western crescent around La Defense, the situation is worse, with a vacancy rate of 13.8 percent. To retain tenants, owners are cutting rents and offering incentives such as rent-free periods and paying for renovations.
“Incentives currently average 20 percent of headline rents,” said DTZ’s Marton. Companies “have a very, very large choice as we’ve rarely had so much supply on the market, so they are becoming super picky.”
Rent-free periods may rise to as much as three months per year for long-term leases of large premises taken up in areas where there is over-supply, according to CBRE.
“Owners are doing everything to retain tenants to avoid costly refurbishment and face the market,” said CBRE’s Coste. “They’d rather lose a finger rather than an arm.”
At about 7 percent, the office vacancy rate in the Paris region is similar to that of London and Frankfurt, according to DTZ’s Marton. The average rate for Europe’s 50 largest cities stands at about 11 percent, spanning from 4 percent in Geneva to beyond 20 percent in Budapest and Dublin.
In Paris’s central business district -- covering the Louvre museum, the Garnier Opera and the Arc de Triomphe -- and the River Seine’s south bank, where Allianz is renovating Laennec to deliver 21,000 square meters to Kering in 2014, the vacancy rate is near the lower end because new developments are scarce.
“In areas without space galore, rents are stabilizing and incentives also tend to stabilize,” said Coste at CBRE. “In markets with more choices, the stabilization has yet to come.”
That remains a worry for Allianz’s Wigniolle, whose company has 75 percent of its properties in Paris.
“In a site like Laennec, we’re quite protected from downsides due to the quality of the asset and of the location,” he said. “There’s a significant difference between the Paris central business district or Paris’s best locations and the suburbs.”