Office take-up in Milan and Rome has doubled in the past year, but vacancy remains high and concern over secondary and tertiary stock is increasing, as the demand for core assets grows.
The 2010 annual take-up has so far increased by 33% to 240,000 m2 in Milan and by 23% to 107,900 m2 in Rome compared to the 2009 yearly total, according to Jones Lang LaSalle. In Milan, where most transactions are concentrated, the 2010 total take-up is expected to reach 300,000 m2 by the end of December, the highest level in several years.
But experts advise against taking these positive figures as a sign that the country’s letting market is picking up after the crisis.
“There is a search for quality, but B and C class assets are suffering,” says Francesco Coviello, European director with LaSalle Investment Management in Milan.
New demand is targeting buildings in the central business district and its periphery. Corporate tenants are also increasingly interested in sustainability and green buildings as well as in their accessibility to public transport, the Metro underground system in particular.
Eros Chiodoni, agency director with Savills in Milan, says tenants as well as developers are focusing on the energy efficiency of class A buildings.
Prime assets sought
“Tenants prefer to save money,” says Chiodoni. “The market is going toward grade-A buildings. Many of them are being developed and grade B and C assets will need to be disposed of. Owners who are not able to intervene with massive renewals will have to incentivise occupiers.”
As a result, rents remained stable in Milan’s centre at €500 per m2 per year, but general rents are stable – or down in some cases, for certain locations or for properties with particular issues.
“The tendency has been for rents to go down by 10-15% or even 20% in some cases,” Chiodoni says. Uncertainty and long negotiations make operations even more difficult. “The average time is six to eight months in Milan, and even more in Rome, where government tenants are involved and bureaucracy is more complicated.”
Based on Savills’ data, prime rental levels in Milan have remained stable in the past trimester, as have yields. Prime gross yields in Milan’s central business district were around 6% in this year’s third quarter. Some big transactions were carried out along with a number of smaller ones.
In August this year, Italian property company Beni Stabili signed a nine-years-plus-nine lease contract with Tecnimont for Beni Stabili’s Torri Garibaldi, a 40,000m2 complex consisting of two towers overlooking Porta Garibaldi station. One of the two buildings, which were formerly occupied by Italy’s national railway service, is being restructured and is due to be delivered at the end of December 2012.
Tecnimont to pay €15m annual rent
Tecnimont, the main operating company within international engineering and construction group Maire Tecnimont, will pay an annual rent of €15m once the scheme is delivered.
The Torri Garibaldi deal was regarded as a sign that the Milan office market is in better shape. Rumours about potential tenants eyeing the office complex shook the rental market this summer after it had slowed down over the past few years, to the distress of local market players. This and other recent lease agreements involving prime office buildings in the city, though, do not necessarily reflect the real level of demand.
“In general terms, demand has improved, but we have not gone back to the levels of our best years,” Chiodoni says.
“Tenants move from old to new buildings and stock will continue to be an issue until we see some real new demand.”
LaSalle Investment Management’s Coviello says a significant part of the recent demand comes from companies trying to reduce the space they occupy rather than new tenants and buildings coming onto the market. “We haven’t had much renewal, but have had a lot of compressed corporate space. That makes for scarce growth, but also compression and improvement,” Coviello says.
If several tenants are moving into smaller buildings, some others are looking for bigger ones.
According to Susan Trevor-Briscoe, head of research with Savills in Italy, almost all tenants seeking bigger office space in Milan are multinational corporations.
“Some big tenants, from 5,000 m2 up, have acquired new spaces,” she said. “They are in almost all cases multinational companies and [transactions] are often consolidations with a negative net take- up. New interest often comes from local companies.”
Corporate tenants who are securing bigger spaces for their offices include mobile phone company Alcatel, film giant Warner Brothers and marketing group Aegis Media.
While tenants move to smaller or bigger office premises, new quality schemes keep being developed.
According to Douglas Babington Smith, head of capital markets with JLL in Italy, supply is now high, especially when compared with past years. “Suppliers have been very tight in the past,” Babington Smith says. “Now in Milan there is a high level of supply.”
As a result, only buildings that are able to satisfy certain requirements are likely to attract tenants.
Based on LaSalle’s figures, office vacancy in Milan was 9.7% in the third quarter, up from 9.1% in the previous quarter, as some buildings were vacated by corporate tenants in a bid to rationalise space.
Completions push up vacancy
A limited amount of new stock was also completed in the past months, increasing the volume of vacant office space. “Vacancy is rising and this can be an issue. Now it’s all about what is going to make a building stand out,” Babington Smith says.
“New sustainable offices will be developed in the next two to four years,” says Paolo Bellacosa, CB Richard Ellis’ director of capital markets in Milan. “Green building and energy efficiency are forces in the market and developers will have to choose between going that way or pulling out.”
Bellacosa thinks the development of class A offices in Milan may also be boosted by investors’ requirements. “In a world which used to be dominated by trade and re-trade, different kinds of buildings managed to attract investors,” he says. “Today, funds ask for core assets and we do not have many of them.”
According to Bellacosa, most core buildings in Italy are retail assets. “This is why investors mainly target shopping centres,” he says.
In addition to the delivery of new schemes, the renovation of existing assets may also bring new quality buildings to the market. Savills’ Trevor-Briscoe says: “The older spaces will need to be reconsidered.” Beni Stabili spent €35m for the renovation of one of the Garibaldi towers and it is investing a further €70m for restructuring the second one.
Few property companies in Italy can afford to invest such sums in the upgrading of old assets – and the renovation of some obsolete office buildings is not always possible. Trevor-Briscoe says: “Some buildings will no longer make sense.”
The Procaccini business park, for instance, was built in the 1990s in the north of Milan’s city centre. Partly owned by Beni Stabili, the four-tower complex is home to the headquarters of electrical equipment manufacturer BTicino, which sold part of the asset to the Italian real estate firm last year with a sale and leaseback contract for around €20m.
Although part of Milan’s office stock is simply old, some partly or entirely vacant buildings do not attract tenants because of their location, although some of the city’s semi-central areas are being renovated. The Porta Nuova renovation project, which was started last year and is due to be completed in 2013, will add value to the Garibaldi-Repubblica area, near Milan’s central station.
“Porta Nuova is a benchmark towards which developers should tend,” CB Richard Ellis’s Bellacosa says. “Although not everybody can spend that much.”
Other areas in the city’s periphery, such as the south-western suburb of Assago, have suffered from a lack of public transport but will soon be provided with an underground connection to Milan’s centre, while traditionally industrial areas such as that of Sesto San Giovanni are still struggling.
