With Europe?s economic revival gathering strength, the continent?s Latin markets are heating up, and crowding in historic city centers is sending occupiers heading for the hills.
In Madrid, the business surge last year boosted takeup 20 percent to a 5.55 million sq. ft. (500,000 sq. m.), a high for the 1990s that has squeezed vacancy rates to 5.1 percent. But the shortage of large or even medium-sized floorplates could well reverse those numbers this year:
Says Juan Roma, CB Commercial Hillier Parker?s Madrid-based chief of research, ?We?ll see a vacancy rate of barely 4 percent by Christmas, down one-third from two years ago, and rents will hit $26.64 per sq. ft. per year, up one-third from 1997. And the upturn in rents has only begun. It?s an owners? market.?
CB Commercial?s numbers are an alarming measure of Madrid?s space famine.
Excluding the 14 percent sopped up by pre-lets, available space in Madrid was down one-fifth earlier this year, equaling the level of 1991. Availability of secondary property is plentiful, up more than two-thirds from the level recorded a year ago. But despite a jump of nearly 30 percent in demand from first-quarter 1998 to first-quarter 1999, supply of new property rose less than 10 percent, which has shrunk vacancy levels to as low as 1.7 percent in Madrid?s CBD (Paseo de la Castellana).
Forward Planning a Prereq
Says Jones Lang LaSalle (JLL) Research and Marketing Director Emilio Sanchez: ?The supply crunch is severe for companies looking for property on short notice. Lettings this year could drop 20 percent. With pre-lets that won?t come out of the ground before the end of next year, this market requires forward planning.?
Above right: While Plaza Mayor (pictured) reflects the Madrid CBD’s beauty and history, the center city’s space scarcity is driving corporate tenants to Madrid’s northern edge.
With a supply squeeze downtown, occupiers are favoring new suburban districts in the east-west ring circling Madrid?s northern edge. Those districts offer good communications and transport facilities. Demand for space on the capital?s rim has skyrocketed by four-fifths in the past year. Says CB Commercial?s Roma, ?The government is providing lots of good infrastructure and communications in the northern edge. Financial services still cluster in the center, but others are moving out.?
The upscale quality of Madrid?s periphery sites is also a lure.
Says Knight Frank?s (KF Frank) Madrid-based Director of Research Dominic White, ?Edge-of-town locations offer state-of-the-art buildings. Downtown, there are no virgin sites and no large floor plates. That?s why the outskirts are getting lots of multinationals? call centers.?
Anxious to nail down good locations and smart buildings, some occupiers are even buying land to build their own quarters. And that?s sending land prices through the roof.
Prime Time for Price Gouging
?This is a window of opportunity for price gouging,? White explains. ?One property east of town at Campo de las Naciones sold for a 70 percent price rise year to year, and that was almost double the price of three years ago. But for occupiers buying now, most of future rents are already in the price, so they?re getting in at the top.?
Steamy rent prospects are luring back developers and investors burned by the property collapse of the early to mid-1990s. Transaction values on large deals have skyrocketed, squeezing yields close to 5 percent.
Says JLL?s Sanchez, ?In the 2001-2003 period, you could see supply rising to 3.33 million sq. ft. (300,000 sq. m.); that?s triple the supply of recent years. As for investors, a few years ago, when things were down, there were far more buildings than investors. Today, there are far more investors than buildings.?
With product scarce, Knight Frank even sees some investors partnering with developers. ?These investors,? says KF?s White ?are opting to get in on the ground floor. In 18 months time we?ll see a larger volume of schemes.?
Barcelona: A Catalonian Mirror
On Spain?s Mediterranean coast, Barcelona is experiencing similar rental growth and vacancy rates. However, with smaller space requirements, usually for regional headquarters, the supply crunch is less severe.
Takeup up last year in Barcelona exceeded 2.2 million sq. ft. (200,000 sq. m.). Future logons, however, will be hampered by the scarcity of floorplates in the 11,111-sq.-m. (1,000-sq.-m.) range.
Knight Frank sees the drought persisting, though some 1.1 million sq. m. (100,000-sq.-m.) of space is set to come onstream in the near future.
Lisbon?s Prime Periphery
In Portugal, which is still riding the aftermath of the 1998 World Exposition, the space crunch in downtown Lisbon has sparked development of business parks along the Lisbon-Cascais highway. The highway lies west of the capital towards the Atlantic coast, the favorite residential haven for executives. And the emerging suburban business parks offer high-tech facilities, broad floorplates, and good transport and communications (most of it prelets), broad floorplates, and good transport and communications.
In fact, the supply of new space on the periphery accounted for half of greater Lisbon?s total new supply last year. Group Inogi Torres de Lisboa has the largest office site (totaling 788,888 sq. ft., or 71,000 sq. m.), but foreign developers, such as the Dutch Multi-Development Corp (with a total of 511,111 sq. ft., or 46,000 sq. m.) and Sweden?s Aranas (with a total of 588,888 sq. ft., or 53,000 sq. m.) are also active. The high quality of Lisbon?s suburban space has already caused a narrowing of the rent differentials between the periphery and the CBD, according to Knight Frank.
Above right: While the 1998 World Expo (pictured) increased short-term leasing in Lisbon, the refurbishing of the 815-acre Expo site northeast of town will likely provide 5 million sq. ft. of long-term quality space.
Says Collin McDonald, Knight Frank partner in Lisbon: ?Managers want to live downriver near the sea coast, and the drive to Lisbon has become impossible. So developers are bringing the work to the people. These business parks have better quality space. They?ll get most of the action from now on.?
Lisbon?s takeup for all of 1998 rose 20 percent to a record 1.62 million sq. ft. (146,000 sq. m.), with rents rising 10 percent.
Domestic Demand Still Strong
While short-term leases for the 1998 World Expo accounted for much of last year?s space grab, CB Commercial indicates that domestic demand continues strong, thanks to expansion by a number of government entities in midtown. Knight Frank notes that the ?buoyant? demand earlier this year is pointing towards 1999 takeup for Lisbon that will match 1998?s record level.
Rental growth has pushed prime space rates in Lisbon to $24.48 per sq. ft. per year. That?s a five-year high, but still barely two-thirds of 1991?s peak rent level. Poor supply levels have shrunk vacancy in midtown to less than 3 percent.
Fortunately for corporate space occupiers, Lisbon?s rental fever may abate over the medium term. According to analysts, the crunch has brought an estimated 1.66 million sq. ft. (150,000 sq. m.) of speculative development into the pipeline. The 815-acre (330-ha.) Expo site northeast of town, which is being refurbished, has the potential to provide 5 million sq. ft. (450,00 sq. m.) of space for offices, hotels and shopping centers, all connected to the south of Portugal via the Vasco da Gama bridge, Europe?s longest river crossing. Sony has already decided to set up a facility at the former Expo site.
?We?re still on the crest of a good run,? says KF?s McDonald, ?but rents will plateau over the medium term.?
Milan?s ?Second Ring? Rush
Likewise, crowding in Italy?s historic city centers is causing urban flight.
In Milan, occupiers are heading for quarters near the area?s ?second ring road,? where they are finding adequate communications and transport links, and rent levels in the range of $14.72 to $19.62 per sq. ft. per year. By comparison, rates in Milan?s CBD are running between $19.62 and $24.53 per sq. ft. per year.
Among Milan-area service providers, the big players are leading the pack.
Notes Michael Follett, president of Jones Lang LaSalle Spa, ?With tight restrictions and archaic configurations downtown, projects are going up south of town near Bocconi University, and at a vast mixed-use scheme on former industrial land east of town towards Linate airport.
?We have two 111,111-sq.-m. (10,000-sq.-m.) projects going up at San Donato on the southeast side of town near the Tangenziale motorway,? Follett continues. ?It puts commuters less than a half hour from work, and the quality of the facilities will attract high-tech companies with mobile staffs and lots of hot-desking.?
Adds Gianpaolo Cassini, manager of special projects for Knight Frank in Milan, ?We have developed a project in the Biccocca sector on the northeast of town. There is a total land area of nearly 11.1 million sq. ft. (1 million sq. m.), more than one quarter of it office space. Deutsche Bank has finished building a facility, and Siemens has finished the first stage of its facility.?
Rome?s Southwest Flight
In Rome, development restrictions in the capital?s historic center city are keeping space availability prospects bleak. CBD rents for large space requirements in the range of 5,555 sq. ft. to 11,111 sq. ft. (500 sq. m. to 1,000 sq. m.) are running in the range of from $17.16 to $22.07 per sq. ft. per year.
But southwest of Rome?s CBD, the Esposizione Universale Roma district, which boasts quality roadways and common transport access, is attracting occupiers to space that is renting in a range of from $12.26 to $14.72 per sq. ft. per year.
If low investor interest is any measure, rental growth is likely to be modest in Rome over the near term.
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