Is Paris Burning? French Office Market Afire

With French economy’s broad-based upturn, the rush of occupiers hungry for modern space is turning into a stampede. But with a supply drought, the sudden demand upsurge is bringing Paris region prices to a boil.

With unemployment under 10 percent and reviving consumer spending, observers see a long upward spiral.

“We’re not yet in the space rush that brought the early 1990s’ crash,” says Philippe Perello, Knight Frank associate director in Paris. “But prices are already beginning to hot up. We see a 15 percent price rise this year alone.”‘

Benoit du Passage, chief executive of Jones Lang Lasalle’s (JLL) Paris office, is more cautious. Says du Passage, “The Paris market is booming, but it is a healthier market, much more mature than a decade ago. This upturn will be long and sustained.”

Rebounding from 1997’s bottom (March 1998 World Reports), Paris’ central business district (CBD) rents, says JLL, will likely top US$47.95-$49.31 per sq. m. this year, up from 1999’s $45.21 and 1995’s $34.25, but one-third below the 1990 highs.

Diminished supply of new or dedicated office buildings and shrinking vacancy rates will likely heat up rents. Much of the 11.1 million sq. ft. (1 million sq. m.) of CBD space coming on market in the next two years is already pre-let.

Following the M&A wave (November 1998 World Reports?), demand for large floorplates and 55,555 sq. ft.-plus (5,000 sq. m.-plus) buildings is intensifying price pressures. Some speak darkly of developers holding space off market, anticipating higher yields later.

‘IT Changing Market’s Nature’

Says Pierre Saunier, president of Soprec Entreprises, business branch of Feau, “The IT revolution is changing the market’s nature. Buildings that lend themselves to new technologies are renting at a high premium.”

Says Monique Benisty, Auguste Thouard research chief, “The take-up is in large part coming from front-end sectors where the action is: information technology, telecom and the financials. In three years, we’ll see Paris CBD prime rents rising 40-50 percent to the $61.64 per sq. m. level.”

Where’s the rub? By most accounts, the near-term outlook for new product remains bleak.
Says Soprec’s Saunier, “Promoters have something like 124 projects of some 26.7 million sq. ft. (2.4 million sq. m.), but they won’t come out of the cartons for two years at best.”
Average vacancies in greater Paris shrank to 4.1 percent early this year, hitting a meager 3.3 percent in the CBD. At La Defense, the modern business district west of town, available space is a wafer-thin 1 percent.

Says Knight Frank’s Perello, “Last year, we thought new space coming onto the market [in 2000-01] would meet demand. Now, the supply/demand balance timeline is being pushed out to 2002-03. Decision times are shortening, and there’s no more free rent or fittings.”

Although the specter of the late ’80s speculative melee looms, some see a different scenario.
Says JLL’s du Passage, “Since the mid-’80s, we’ve added 1.67 billion sq. ft. (15 million. sq. m.) of sophisticated office space in Paris. So the large number of sophisticated properties will blunt any panic fever.”

Suburban Flight in Paris

Building limits in Paris’ historic center are sparking the familiar flight to the outer rim occurring in other European capitals (Sept. ’99 World Report). The suburban spillover has favored La Defense, the only area with new buildings of 166,666 sq. ft. (15,000 sq. m.).

But planners are trying to reverse the flow from the capital’s congested western suburbs towards Montparnasse on the Left Bank and Clichy to the north. At the city’s eastern edge along the Seine, the Paris Rive Gauche scheme, metro-linked to downtown, boasts 777,777 sq. ft. (70,000 sq. m.) pre-let to upscale firms including Andersen Consulting, Sanofi and Seita (the French tobacco monopoly).

Says JLL’s du Passage, “Today, firms are more interested in efficiency than prestige center city addresses, so good, established secondary locations with modern facilities in the suburbs are getting far more attention.”

Auguste Thouard’s Benisty agrees, “With space so tight downtown, tertiary areas’ vacancy rates are down to 1.1 percent.”

Smart Money Scents Gains

The smart money scents gains. Solid rental growth prospects have lured investors, some already unloading lots bought at 1997’s bottom.

Says Dan Cummings, London-based LaSalle Investment Management CEO, “We bought 13 Paris buildings worth $400 million in the year leading up to 1997 at very low interest rates; we’ll be selling off the last lot by summer, with an 80 percent internal rate of return. There’s more growth in these properties, but we feel the big price boom has already taken place.”

According to Lasalle Investment, record investment of $4.42 billion-plus last year flowed into Paris office space alone, a 30 percent-plus increase over 1998. Much of the new cash is coming from Europe-wide investment funds willing to back new projects inside the Euro zone. With a limited market supply, foreign investors, notably British and German banks, are turning to development financing.

Leading French property firms Unibail shelled out $864 million for a six-lot portfolio of some 3.3 million sq. ft. (300,000 sq. m.) in Paris’ western suburbs.

Says Gerald Blundel, Lasalle Investment Management head of investment strategy, “The big investment money has already been made. Now we’re seeing long-term players in for income and growth, and there’s lots of it left. We’re seeing leverage of 65 percent, where it was closing on 100 percent in the late ’80s, all debt. So this upturn has a few more years of life.”

Adds Lasalle’s Cummings, “We’re bullish on France. We’ve created a new vehicle, Euro Five, that’s acquiring property on the city’s edges, at La Defense and in the southwest. Our strategy is income and growth, and we’re looking for cash-on-cash in excess of 6.5 percent on equity.”

Lyon’s Hot Market

Outside the Paris region in France’s 10 medium-sized cities (Bordeaux, Lille, Lyon, Marseilles, Montpelier, Nantes, Nice, Rouen, Strasbourg and Toulouse), 1999 take-up rose nearly 20 percent to 9.2 million sq. ft. (830,000 sq. m.), reports the prestigious Institut de l’Epargne Immobiliere et Fonciuere (IEEF). That’s well beyond 1990’s peak of 8.55 million sq. ft. (770,000 sq. m.).

France’s second industrial city, Lyon provided 20 percent of ’99’s 10-city total. With vacancy rates under 5 percent, Lyon’s space crush boosted 1999 rents by 10 percent-plus to $14.68 per sq. ft.