At the end of last year, audit firm Ernst & Young moved its Paris headquarters to Tour First, a 52-storey, 231 m high sky-scraper in Europe’s largest business district, La Défense.
The 79,000 m2 office asset was built in 1974, but a series of renovation works that were started in 2007 and completed last year increased its height and energy efficiency, which made it more appealing to Ernst & Young, now the occupier of 32,000 m2 across 19 floors.
Refurbished by US property firm Beacon Capital Partners, French insurer Axa’s real estate division and developer Altarea-Cogedim, the skyscraper, which is the tallest in the city and the highest office building in France, is one of the most attractive to tenants in the area, whose office assets, built mostly between the 1960s and the 1990s, are too out of date to attract corporate occupiers.
Not energy-efficient
“The majority of towers in La Défense are outdated and do not fit modern occupiers’ demands,” says Etienne Prongué, director of international investment with BNP Paribas Real Estate in Paris. “Occupiers want green buildings, but because of the financial crisis there is a lack of them in La Défense. Tour First and Praetorium are the only two available.”
German fund manager KanAm is now struggling to find tenants for more than 70% of its 53,000 m2 Tour Egée, built in 1999 also in La Défense, after it was vacated by Ernst & Young. According to market sources, letting the building’s vacant space will be a necessary step for the owner to sell it.
Paris’ main business district is not the only area where take-up levels are affected by a lack of new space. In Paris’ Île-de-France, where most transactions are concentrated, 40% of a total of 52.7m m2 office stock was over 25 years old in 2011, according to research by BNP Paribas RE. Only 10% of the total was five years old or newer, and refurbished buildings accounted for most of it.
Take-up levels in the area fell 18% to 514,000 m2 in this year’s first quarter compared with the equivalent period in 2011. “This result is in line with the 10-year average,” says Prongué, “but still lower than last year’s first quarter.”
Transactions involving office space of over 10,000 m2 dropped 16% year-on-year in 2012’s first quarter, while new lettings between 5,000 m2 and 10,000 m2 fell 7%. “Above 5,000 m2, tenants prefer or tend to choose new or refurbished properties,” Prongué said.
While the availability of new office space is limited in the quartier d’affaires on the river Seine’s western crescent, Paris’ central business district is no better off in terms of new office supply.
“Above 5,000 m2, you will hardly find any new premises,” says Boris Cappelle, director of investment with Savills France. “This is why rents (for large prime office spaces) are expected to stabilise or increase.”
Prime office rents in Paris’ city centre increased slightly to €830 per m2 per year in Q1 2012 after they had remained stable for the past year.
Rents going down
According to BNP PRE’s Prongué, overall rents in Paris will soon return to previous levels. “Rents are going back down,” he says. “They were higher last year and they include charges.”
Although vacancy rates remains low in Paris city centre, where they were around 7% in the first quarter, large spaces are hard to find. “Vacancy is very low,” says Lydia Brissy, Savills’ director of European research in Paris. “It can be less than 5%, depending on the area. But there are very few large buildings exceeding 1,000 m2, and we have strong demand.”
Just as Paris’ offices are attractive to investors, so they are to tenants, who favour Paris over other European capitals.
Based on BNP PRE’s research, take-up in central Paris was 424,000 m2 in this year’s first quarter, unchanged from the last three months of 2011 but less than the 500,000 m2 transacted in Q4 last year.
However, this figure is well above the 233,000 m2 of new office space let in central London in this year’s first quarter, the 109,000 m2 transacted in Berlin, the 100,000 m2 achieved in Brussels and the 54,000 m2 of space occupied in Madrid.
On a rolling year basis, the amount of office space transacted in Paris city centre in Q1 2012 was about 1.9bn m2, slightly less than in the corresponding period last year, but almost double central London’s 1bn m2.
Transport, logistics and distribution tenants were the most active in Paris, accounting for 20% of take-up of spaces over 2,000 m2 in this year’s first quarter. This was up from 13% in 2011 overall, when the bank, finance and insurance sector accounted for most new leases.
The industrial sector accounted for 16% of total take-up in this year’s first quarter, followed by banks, financial institutions and insurers at 15% and by the public sector at 14%.
Law firms and consultancies accounted for 12% of new leases, followed by IT companies at 11% and communication and design tenants at 9%.
Outside Île-de-France, Lyon remains the most appealing lettings market. “It is the second biggest office market in France,” says Savills’ Cappelle. “It has the TGV (high-speed train) and attracts big companies.”
The Oxygène tower, opened in Lyon’s business district of Part-Dieu by Unibail-Rodamco in 2010, is flagship for the city, says Cappelle. “It is a good test for the market,” he adds. “It is over 80% let and it will be full soon.”
Lyon offers stable rents and a large market, says Cappelle. “You can find state-of-the-art assets for reasonable rents.”
According to research by Jones Lang LaSalle, 2011 was the second best year for Lyon’s office market after 2007, with 265,000 m2 of surface changing hands. In this year’s first quarter, take-up in the city reached 45,000 m2, 7% up from the equivalent period in 2011.
The vacancy rate in Lyon’s office market was 5.5% as stock decreased 14% in the past year, says JLL.
Prime rents in the Part-Dieu business district were stable at €270 per m2 per year, while they were €173 per m2 in the city’s surrounding area.
Based on JLL’s forecasts, the Lyon area will achieve office take-up between 200,000 m2 and 220,000 m2 in 2012.
Rents remained stable in the French retail market, which offers good opportunities, says Savills’ Brissy.
Savills’ research shows that rents for shopping centres in France’s prime locations were €2,000 per m2 per year in 2011, while rental levels for prime retail parks were €185 per m2 per year.
Just as in the office market, lease agreements in the retail sector took a long time to settle, except for deals involving prime locations, where good assets remain difficult to find.
