Rents are edging up, and occupier demand strengthening in the Milan office market.
Occupier demand has improved for the second consecutive year, with take-up of 150,000 m2 in 1995 and more than 200,000 m2 in 1996, according to Milan-based consultant Centro I.
Availability of office space is still running at more than 1m m2, out of a total stock of 8.5m m2, but most of this is poor quality and is unlikely to be let quickly.
Currently, there are no major development starts planned for Milan. The only significant site under construction is the 350,000 m2 Bicocca scheme, a mixed development on the site of an old Pirelli factory 3km north of the city. But its 180,000 m2 of office space is disappearing quickly: Siemens has bought 45,000 m2 and Deutsche Bank has agreed to buy four towers totalling 33,000 m2.
The lack of quality space on the market is beginning to be reflected in higher prime rents. At the top of the market in 1990, rents reached L 800,000 per m2, falling dramatically to L 350,000 per m2 in 1995. During the last six months, they have edged back upwards, to more than L 400,000 per m2, says Healey & Baker. Jones Lang Wootton is even more bullish, putting prime rents at L 450,000 per m2, while isolated deals have been done at L 500,000.
The market has turned the corner, says Marina Bottero at Jones Lang Wootton. “There has been lots of letting activity and we’ve seen companies coming in and taking advantage of the low rents. Rental values are not necessarily increasing but take-up for good quality space is strong.”
Some large deals have been signed this year already. Since January, several companies have moved in the 4,000 m2 to 12,000 m2 bracket.
In the historic centre, Grant Thornton took 1,600 m2 in a recent refurbishmet in Largo Augusto, while in “semi-central” locations, lettings included a new headquarters building of 14,500 m2 in via Montecuccoli to Kraft Jacobs Suchard, and two recent refurbishments: 11,000 m2 acquired by Delotte Montell in via Pergolesi, and 7,000 m2 to Gillette in via Pirelli near the Central Station. Jones Lang Wootton acted on these lettings. And in the suburbs, Canon has just signed up for 14,000 m2 on the Milanofiori business park: Healey & Baker was the agent here.
The details of these transactions are shrouded in the traditional Italian veil of secrecy, but top buildings in the sought-after historic centre fetch L 400,000 or slightly more per m2, while the semi-central locations range from a top L 350,000 per m2 to L 250,000 per m2. Peripheral office rents vary wildly depending on accessibility and quality of building; here the range is put at L 150,000 – L 200,000 per m2.
Marina Bottero is cautious about supply and demand figures: “Nobody knows how much vacant space is on the market, whether it is 8% or 20%.” She detects a trend for companies who moved out to suburbs such as Milanofiori and San Donato Milanese in the 1980s to consider moving back to the centre in the 1990s.
This reverse exodus is partly due to the fall in rents in the central business district. But in many cases it is because planned infrastructure improvements such as the construction of a new east-west metro line, and a new ring road, failed to materialise.
There has been almost no office development in Milan during the 1990s, for a combination of reasons: many developers were under investigation, demand was weak, and planning restrictions limited development to designated areas.
So while market is still bedevilled by an oversupply of office space – a legacy of the 1980s boom – there is also a lack of modern, high-spec offices.
Building specifications are increasingly important. Companies are now looking for modern open-plan offices with raised floors. Insurance giant (and Milan’s biggest landlord) Generali recently refurbished a 6,000 m2 building in via dei Meravigli in the city’s main business district. It has subsequently been let to Schroders and Readers Digest at rents approaching L 500,000 per m2.
Generali has been at the forefront of landlords seeking to improve the quality of their stock. Gianfranco Berretta, head of Milan property, says: “Companies now want higher specification buildings. This situation has not been helped by the lack of development in the city and the bureaucratic problems of getting planning consent for new buildings in the historic centre.”
There are signs of a revival in the development arena, however. Three of Italy’s leading construction companies have got together to launch IP Immobiliare, a new property company with combined assets of around L 600bn. Backed by a number of banks, the three companies, Impresit, Lofdigiana and Girola, will merge their property interests into the new company. The transfer results from a previous successful joint venture between the three, Impregilo.
The company is said to be looking at purchasing land in the north of Milan around Malpensa International Airport which is set to get become the main international hub for the city by 2005.
A second runway, high-speed rail link and new roads are planned. Many believe that this will herald the growth of a new out-of-town business district.
Paul Bacon at Healey & Baker says: “A lot of multinational companies who want to be in Italy can see this is likely to happen and are biding their time before moving to new headquarters in the central business district.”
Agents are careful not to sound too bullish about the prospects for rental growth, however. While confidence may be slowly returning to the market, the mood is still a long way from the heady days of the late 1980s.
There is a lot more caution this time round, says Alberto Lunghini of Centro I.”We are in the middle of a long, 12-year cycle which started in 1989 and will last until 2002. It will take a long time but office rents will eventually re-align themselves. Historically, they are not very far away from rock bottom,” he says.
“The sign of a successful Milan market is not one where prices are rising but one in which lots of deals are being done,” he adds.
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Bicocca When the Pirelli Group first thought of the Bicocca project in 1988, few realised that it would be the only major development to take place in Italy during the following decade. What started as a 110,000 m2 development of the former Pirelli tyre factory north of Milan has become the largest scheme in Italy totalling 350,000 m2, with offices accounting for 180,000 m2. The developer is Milano Centrale, a Pirelli subsidiary. So far, the scheme has been successful in attracting international tenants. Electronics giant Siemens bought 45,000 m2 of offices in 1995; other occupiers include Digital, Reuters and Shell. Deutsche Bank is expected to announce the purchase of three or four high-spec office buildings at Bicocca totalling 33,000 m2. It aims to rationalise its Milan property portfolio following the purchase of regional banking group the Banca Popolare di Lecco in 1996. Although the Bicocca buildings are still under construction, Deutsche Bank has already started to sell off its surplus office space in the city including a 2,000 m2 building in via dei Mercati and its former 6,000 m2 headquarters in Piazza San Babila. Planned infrastructure improvements to the Bicocca site should be ready in three years’ time, when the Deutsche Bank towers are due for completion. The city of Milan has plans to extend the subway network to make the site more accessible and a new high-speed tram is also planned. The plan is to turn Milano Centrale into Milan’s premier business centre says marketing director Battista Sormani. “Many multinationals companies in Milan are looking for a working environment outside the city centre and for this Biccocca will be a very attractive location, particularly when the new transport links are built,” says Sormani. “This project is the most important to take place in Italy for its urban regeneration and how we have turned a broken down industrial area into a modern business district,” he adds. In addition, Milan’s Universita degli Studi and Italy’s national research centre have moved to the area. |
