Savills - Office Market Report - Barcelona - Spring 2009Document Transcript
Barcelona office market Spring 2009Take-up and vacancy rates Quarterly rental growthSource: Savills Research Source: Savills Research“A difficult start for 2009 is characterised by deteriorating marketfundamentals, with rising vacancy, weakening rental values andrising yields. The lack of attractive investment alternatives togetherwith the fall in the Euribor has nonetheless contributed to a numberof investment deals, which are based on quality assets, tenantstrength and long lease term contracts”. Eusebi Carles - Director After sixty quarters of continued growth, the Spanish The 1.5 point rise in vacancy rate during the lasteconomy has officially fallen into recession, quarter has not directly impacted on any given region,experiencing two consecutive quarters of negative however large differences can still be observedgrowth. The situation of the Spanish economy is likely between sub areas.to deteriorate in the next few quarters, and this willpossibly continue through to 2011. Until now, the decrease in rental values has been contained, experiencing an average 4.5% q-o-q Despite the current economic situation, the letting decrease. The future fall in demand and the rise inmarket has maintained relative stability, mainly due to office vacancy will put further downward pressure onthe completion of several owner-occupier purchase rents.deals and large turn-key transactions. In 2008 the total volume of investment reached The delivery of new projects has increased the city’s 1,056 million euros, representing a 46% decrease withoffice stock by 193,000 sqm, 80% of which has been regards to 2007 figures. Lack of finance, negativeincorporated into the market as available stock, mainly growth forecasts for the Spanish economy and highwithin the Decentralised areas and the 22@ district. seller expectations are preventing confidence growth and the completion of deals.
EconomySpanish economic situation treasury and will break for the first time the European Stability Pact reaching 6% in 2009, an unprecedentedThe Spanish economy has experienced a 1.0% fall the level since the early 90s. As a result of a fall in taxlast quarter of 2008 in terms of GDP. After two revenue, led by sharp tax falls on the real estatecontinuous quarters of negative growth Spain has now sector, Government savings will be particularly affectedtechnically entered a recession. According to several and experience a considerable decrease.economic reports, this economic contraction could lastup to six consecutive quarters, representing the Most economic indicators which forecast the future oflongest recession period since the return of the economy are now showing negative results.democracy. However, in comparison to previous economic recessions, the speed and volume of the deteriorationPrevious recessions in Spain is now considerably higher.Recession Duration Quarters q-o-q change On the other hand, inflation levels have levelled off and closed at 1.4% in 2008, representing a ten year Q1 1975 -0.2% low. This decrease represents the fifth consecutive 1975 2 quarters decrease in the interannual rate since its record-high in Q2 1975 -0.1% July (5.3%), when the value of the Brent crude oil Q4 1978 -0.1% 1978 1979 2 quarters barrel reached $147. The fall in inflation has mainly Q1 1979 -0.5% been due to falling oil prices, and to a lesser extent, to Q2 1992 -1.0% a fall in other oil related products, such as transport. Q3 1992 0.0% The value of the Brent crude oil barrel has decreased 1992-1993 4 quarters since August, reaching an average value of $43 in Q4 1992 -0.4% December, its lowest level since December 2004. Q1 1993 -1.1% Q3 2008 -0.3% GDP growth and interest rates Now ? Q4 2008 -1.0%Source: INESeveral months of uncertain economic growthforecasts together with the economic difficultiesexacerbated by the international financial crisis and thedownturn in the building sector, have led theGovernment to re-adjust its economic forecasts.According to the 2008-2011 Spanish Stability Programapproved by the Spanish Cabinet, GDP growth hasbeen estimated at 1.2% for 2008, whilst in 2009 GDP itis expected to show a 1.6% decrease. Internal demandincreased by a mere 0.7% in 2008 and is expected toregister a 3.2% fall this year. This will be triggered by a9.3% decrease in investment levels, and a 1.5% fall in Source: INE, European Comissionprivate consumption, a level, uncompensated by theexpected 2.1% increase in Government Administration Faced with today’s economic situation, measures haveexpenditure. been taken to counteract the crisis, which include ECB tax cuts, adopted to limit the impact of the recession.Whilst the export sector experienced a GDP gain of In January, the ECB announced the fourth consecutive0.6% last year, it is expected to show a 1.6 point interest rate cut, a fall from 4.25% to 2% betweenincrease this year. This increase however will not October 2008 and January 2009. This represents asuffice to salvage the current economic recession, record low since the dot-com bubble burst. Furtheralthough it will considerably reduce balance of interest rate cuts are expected in March and June ofpayments deficit. this year, which would likely leave interest rates at 1%.Unemployment levels in 2008 reached a year high The economy will likely benefit from strong inflationsince 1987, with the number of unemployed reaching contention and a fall in interest rates which will in turnover 3 million, a figure which is expected to rise to 4 deliver economic relief for families and companies.million by the end of 2009. The building sector hasbeen amongst the worst affected, followed by theservices and industry sectors. The rise inunemployment will force the Government to intensifypublic expenditure which will affect the balance of the Barcelona Office Market - Spring 2009 2
Demand and Take-upDemand for office space in Barcelona has activities into one building, thus keeping corporatemaintained relatively stable rates. costs to a minimum.These shifts have mainly taken place between the CBD and the 22@ district. CapGross office take-up rates reached 351,000 sqm in Gemini, who moved to 22@ from the prime section of2008. Despite the current economic situation, this only Diagonal Avenue, is a clear example of this shift. Arepresents an 11% fall compared to 2007 (394,000 further example includes Grifols, developer of plasmasqm), and a 27% fall compared to 2005, when derivatives. In the midst of the real estate downturn,Barcelona reached a record office take-up (485,000 Grifols acquired an office complex in Sant Cugat insqm).These figures contrast with the significant fall in order to concentrate their corporate activities into onetake-up rates in larger office markets, some of which building and retain vacant office space for the futurehave experienced up to a 50% fall in inter-annual take- expansion of the company.up rates. The Barcelona market, given its wide rangeof sectors, has been relatively stable in comparison. Main relocationsTake-up quarterly change Company Origin Destination CAP GEMINI Diagonal-Prime 22@ GRIFOLS Several locations Sant Cugat del Vallès ISDIN Diagonal-Prime 22@ JOHNSON DIVERSEY Esplugues Cornellà CTTI Pº Gracia-Prime Gran Via-Hospitalet Source: Savills Research Whilst companies were not previously drawn to such areas, these buildings are increasingly attracting attention, as they offer large surface areas at competitive prices, with modern specifications,Source: Savills Research providing an overall reduction in occupational costs.In the second semester, take-up reached 160,000 sqm. These large deals (>3,000 sqm) accounted for 64% ofThese levels show a slight decrease from the first the total take-up.semester of the year, a yearly pattern not uncommon,given the usual reduction in take-up in the summer The demand for small areas continues to lead themonths. It is worth noting, however, that the number of Barcelona market, with 51% of the deals being fordeals closed during the last quarter of the year fell by areas below 500 sqm. This demand is mainlyapproximately 26% compared to the average of the concentrated in the CBD and the City Centre, wherefirst two quarters, which shows a slowdown in vacancy rates are consistently low and mainly in mixedunderlying take-up rates. use or obsolete buildings. The average surface area for deals in the CBD has been 460 sqm.In terms of areas, the City Fringe constitutes 51% oftotal take-up, thus confirming the continued tendency Public entities represent the principal occupier offor demand to shift to areas such as the 22@ district. space, accounting for 20% of the total take-up. EntitiesSupply within this area is mainly comprised of modern, such as the Spanish Telecommunications Commissionstate of the art buildings, offering competitive rental (CMT) and the Telecommunications and Informationvalues and located in relative proximity to the CBD. Technologies Centre (CTTI) have signed contracts forTake-up in the Decentralised areas accounted for 23%. the purchase of turn-key buildings destined for theirThese areas attract demand driven by rental savings. headquarters, in the 22@ district and in the Plaza Europa area, respectively.Rental deals represent almost 55% of total 2008 take-up, whilst owner-occupier purchases and turn-keyoperations have increased; representing 45% of thetake-up with only 18 deals throughout the year and anaverage area per deal of 8,800 sqm.Today’s economy is experiencing a slow-down,following the end of economic growth in summer 2007.In this context, a number of companies present in theBarcelona market have chosen to consolidate their Barcelona Office Market - Spring 2009 3
Supply and RentsSupply and vacancy rate 2009. Sant Cugat will represent 40% of new developments, 42% of which will be owner occupied.At the end of 2008, 407,400 sqm of office space The 22@ district will see the incorporation of 70,000was available, representing an 8% vacancy rate for sqm of new office space, 70% speculative. TheCatalonia’s capital. majority of new developments will be located in the City Fringe and in the Decentralised areas. In the nextThe 1.5 point rise in the vacancy rate compared to the few months, these areas will see a rise in vacancyfirst semester has had no direct impact on any one rates and rents will suffer further pressure.particular area, however large differences can still beobserved between sub-areas. RentsThe CBD continues to experience undersupply, which In general terms, rents in Barcelona experienced amay be slightly eased following the relocation of some small decrease in the last quarter of the year. Thelarge companies to other areas. Despite the hand over current economic situation has increased caution. This,of several buildings in the area, Sant Cugat continues in conjunction with increasing supply, is leading toto show a lower vacancy rate with regard to downward pressure on rents. The extent variesBarcelona’s average rate. An expected 90,000 sqm of according to the different sub-areas.new projects, however, will be delivered in the area in2009. Office submarkets in Baix Llobregat continue to The 22@ district has been the most affected in termsshow signs of oversupply, with vacancy rates reaching of rental values with a quarterly fall of 9%. This may beover 20%. Cornellà, for example, saw the completion due to buildings, initially entering the market atof buildings 6 and 7 of the WTC Almeda Park office relatively high prices for the area, decreasing theircomplex at the beginning of 2008. This increased its rental value due to the economic climate, a necessaryvacancy rate from 12% to 27%. We anticipate however measure in order to increase the building’sthat this vacancy could be reduced with competitive competitiveness in order to attract demand.pricing, given the quality and accessibility of thebuildings. The CBD experienced a significant increase in rents since the mid of 2006, however it has now alsoVacancy rate by sub areas readjusted its rents, lowering them by 5.6% with regards to the third quarter. This has situated prime rents at 25.50 €/sqm/month, a strong contrast to the 32.00€/sqm/month asking price in the area at the beginning of the year. Due to competitive rents and good quality stock, rents in Sant Cugat have not yet been overtly affected by this price correction and have maintained levels similar to those of the previous quarter. Prime rental values by sub areasSource: Savills ResearchDelays in completion will affect many projects.The strong office market of recent years had triggeredfrenzied development activity, in particular areas suchas 22@ district. Given the current uncertainty, severaldevelopers are opting to delay initiation of projects andawait an improvement in the lending markets, and /orthe possible sale of the project. Source: Savills ResearchA total of 333,000 sqm of office space is expected tobe delivered until the end of 2009, 75% will be In the current climate, tenants hold greater negotiatingspeculative, 23% will be owner occupier and a low 2% power, and landlords are being forced to offer morewill represent pre-leased areas. Three of the towers in incentives to attract demand. These incentives will bethe new Plaza Europa ‘New Business Area’ (Realia, most attractive for tenants who can offer solidZenit and Inbisa) will be delivered this year. These guarantees and accept lease terms.account for 27% of total development expected in Barcelona Office Market - Spring 2009 4
The investment marketThe total volume of investment for 2008 reached previously occupied as tenant.1,056 million euros in 36 transactions, representinga 46% decrease with regard to the record high Investors have become rigorously selective buyers,2007 end of year figures, led by a particularly with a focus on assets which guarantee long termstrong first semester, prior to the US sub prime income and long lease terms. Sale and leasebackcrisis. operations are leading the market, pushed by the need to obtain higher liquidity from owner occupiers and dueInvestment volume was 486 million euros during the to the guarantees which long term lease contracts offersecond semester of the year, representing a 30.3% investors. Notwithstanding, each sale & leaseback dealdecrease compared with the same period in 2007. is different and owner solvency, their business plan,These results reflect the deterioration of the investment bank guarantees, agreed rental levels and reviews,market, as a result of increasing lack of available repurchase agreements and other contractualfinance, the negative economic forecasts for the conditions should be carefully observed as they canSpanish economy and the increasing market inevitably affect the final value of the property.uncertainty. Recent sale and lease back deals include the 20Investment volume million euro sale of Barclays Bank main branch at Passeig de Gràcia 45 to the Vila-Casas Foundation, and the Plaça Catalunya 5 sale, part of the BBVA portfolio, to the German fund Deka for 82.5 million euros. Euribor rate - prime office yield gapSource: Savills ResearchOn the more positive side the central banks’ downwardcorrection in interest rates following the bankruptcy ofLehman Brothers has reduced the cost of finance. Thisin conjunction with the sharp increase in yields hasincreased the spreads for investors. Notwithstanding, Source: Banco de España, Savills Researchthe overall scarcity of finance and increased spreadsfrom lending institutions for investments with higher The general downward correction in capital values hasrisk profiles, remain the key problems. Banks are affected, to a lesser extent, assets which offer buyersattempting to reduce risk which has led to a fall in the peace of mind, through long leases to solid covenants.number of players in the investment markets. Thosewith high levels of liquidity and reduced debt, fairing Yields continue to rise, prime yields reaching 6.0%-best. 6.25% , with an inter-annual correction of 125 basis points (a 200 point increase since summer 2007).In this economic scenario, opportunity funds, some Secondary locations have been the more affected byinternational core and core plus funds and family this rise, with a 225 basis point increase as comparedoffices are once again active in the market and are to the levels experienced before the sub-prime crisis.involved in the principal deals currently taking place.National funds, remain generally inactive. Spanish fundSantander Banif Inmobiliario recently announced that itwas putting a two year hold on redemptions and iscurrently looking to sell assets rather than buy.The Catalan Government has become a leader inproperty acquisitions and has been involved in thepurchase of various buildings it occupies. This reflectsthe current Local Government’s call to reduce rentalexposure and purchase certain properties, which Barcelona Office Market - Spring 2009 5