Research report Jones Lang LaSalle Incorporated. The office market in the Greater Paris Region. 3 rd quarter Paradox

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1 Research report Jones Lang LaSalle Incorporated The office market in the Greater Paris Region 3 rd quarter 2017 Paradox

2 Executive Summary Economic recovery not yet seen in results Rental market Since the beginning of the year, take-up in the Greater Paris Region stands at 1,765,500 sq m, representing a slight 2% increase compared with the same period in There were 50 transactions for spaces over 5,000 sq m; a level of performance that has not been seen since By the end of September, immediate supply remained at 3.5 million sq m with a stable vacancy rate of 6.7%. With an average vacancy rate of close to 3%, Paris is currently suffering from a lack of supply. There was no year-on-year change in prime asking rents which stood at 750 in the Central Business District and 505 in La Défense for Q Investment market 4 billion was invested in the Greater Paris Region over Q3 2017, taking the overall year-to-date investment volume to 9.4 billion; this represents a 26% year-on-year decrease. This decrease was mainly due to a lack of mega-transactions as only one transaction for more than over 500 million was recorded. Foreign investors were very active over Q1, but have been more subdued over the last six months. Prime office yields remained stable in Paris over Q However, the wave of yield compression continues to travel across the Western Crescent and the Inner Suburbs. COPYRIGHT JONES LANG LASALLE IP, INC All rights reserved. 2

3 Rental market Good market performance due to large corporate moves 50 transactions for spaces over 5,000 sq m at the end of Q Following a slight slowdown in transactions over Q2, the Greater Paris Region office market posted an increase between July and September 2017 with over 586,000 sq m of take-up. Year-to-date take-up therefore stands at 1,765,500 sq m, representing a 2% year-on-year increase. Large corporate moves had slowed last quarter but improved over Q3 with more than 20 transactions for spaces over 5,000 sq m completed in the Greater Paris Region; this level of performance is on a par with Q (vs 10 over Q2). Although there was the same number of transactions as in Q1, the volume was lower as the first quarter benefitted from the Duo effect and its 90,000 sq m (~263,000 this quarter vs ~323,000 sq m). Cumulatively, there were 50 transactions for spaces over 5,000 sq m; this level of performance has not been seen since There were two transactions for spaces over 25,000 sq m in Q3 - ORANGE with Pont d Issy (57,000 sq m) in Issy-les-Moulineaux and LAGARDERE ACTIVE with Octant and Sextant (~30,000 sq m) in Levallois-Perret - in addition to the four transactions recorded over H1 (NATIXIS, CAPGEMINI, REGION IDF and CREDIT AGRICOLE); these transactions alone accounted for 37% of large corporate transactions. These major transactions were all pre-lets of new or refurbished buildings and demonstrate the appetite of large corporate for these latest-generation buildings. In terms of sectors, finance has been the most active accounting for a third of the overall rental volume with 12 transactions. Next in line were three sectors with seven transactions each: communication-design, legal and the public sector that accounted for 19%, 12% and 13% of take-up for spaces over 5,000 sq m respectively (~723,000 sq m). Total take-up In thousand sq m ,263 2, , Q1 Q2 Q3 Q4 Number of large deals 5,000 sq m 10% 15% 47 29% 18% 23% 5% 50 Q1-Q Q1-Q COPYRIGHT JONES LANG LASALLE IP, INC All rights reserved. 3

4 The small space segment (<1,000 sq m) may have posted a decrease in both volume and the number of transactions, but the medium space segment (between 1,000 and 5,000 sq m) only posted a decrease in volume (-4%) with three transactions more than were recorded by the end of September In the under 1,000 sq m space segment, 1,946 transactions were recorded (183 fewer transactions year on year with a volume of ~552,000 sq m); this decrease was due to a shift in demand from very small companies towards alternative real estate solutions (co-working, serviced offices) as well as a lack of supply, particularly in Paris. Even so, this space segment remained in line with the 10- year average, both in terms of volume and the number of transactions (1,924 transactions for ~519,000 sq m). Could 2017 be the year of the Western Crescent? Due to a lack of supply, there has been a decrease in activity in the Paris market compared with the end of Q (-7%). As a result, the Inner Suburbs have secured the lion s share since the beginning of the year, accounting for half of take-up appears to be the year of the Western Crescent which has already secured over 509,000 sq m of take-up; a great result as such results by this point in the year have not been seen since This market has seen a 150% increase on last year s figures with performance driven by markets in the Southern Bend (~221,000 sq m) and Péri-Défense (~167,300 sq m) which accounted for 43% and 33% of take up in the Western Crescent respectively. The same trend was seen in other areas of the Inner Suburbs, driven by good performances recorded in two out of three of the constituent submarkets. The strongest level of activity was seen in the North where transactions quadrupled. Increases were also seen in the South, although to a lesser extent (+32%). Take-up by geographic area (Q1-Q vs Q1-Q3 2016) 13% 15% 10% 19% 29% Paris CBD La Défense Inner suburbs 10% Q1-Q % 18% 5% 18% 27% 23% Q1-Q Rest of Paris Western Crescent Outer suburbs With good levels of quality supply, these areas of the Inner Suburbs have become the main beneficiaries of the shift in corporates focus which, due to a lack of supply, have not been able to find space in Paris and are now benefitting from these large spaces at attractive rents. La Défense has had a subdued year so far with almost 98,000 sq m of take-up; this is below the 10-year average (139,000 sq m) and is due to a lack of major transactions. COPYRIGHT JONES LANG LASALLE IP, INC All rights reserved. 4

5 Finally, in the Outer Suburbs, decreases were recorded across all space segments, apart from the over 5,000 sq m segment which maintained the same number of transactions (5) including three over Q3 2017, particularly noteworthy was ASSYSTEM s pre-let of the Carré building (~18,900 sq m) which is scheduled to be delivered in Montigny-le-Bretonneux in No significant change in prime values Year on year, there was no change in prime asking rents which stood at 750 in the Central Business District and 505 in La Défense for Q There was a slight decrease in the CBD, despite a high number of transactions completed for values in excess of 750/sq m and a maximum recorded value of 780/sq m; in La Défense the average was dragged down by a substantial transaction that was agreed at a rent of less than 500/sq m. Average rents for second-hand space in these areas have continued to rise overall since 2013, with levels reaching 566/sq m in the CBD and 432/sq m in La Défense. More specifically in the CBD, due to the pressures caused by imbalances between supply and demand, the average rent has been rising for the last three years and has reached a level that has not been seen since Prime headline rents (in /sq m/yr) Paris CBD 10% 18% La Défense 15% 23% 29% 5% Q Q Q Q In terms of incentives, we can now see a reduction in the levels granted during negotiations for larger spaces in Inner Paris; this reduction is even more marked for small spaces. Immediate supply close to 3.5 million sq m By the end of September, the level of immediate supply remained at 3.5 million sq m with a stable vacancy rate of 6.7%. New supply availability remains low and only accounts for 15% of overall supply, or 512,000 sq m. Paris is currently in a state of undersupply with an average vacancy rate of close to 3%, with levels of around 2% in Paris 5/6/7 and Paris 12/13 and a rate that dipped under 3% in the CBD over Q Most of the available space is still concentrated in the Western Crescent (890,000 sq m) where the vacancy rate stands at 11.9%. COPYRIGHT JONES LANG LASALLE IP, INC Tous droits réservés. 5

6 Investment market Where are the mega-transactions? Market less active than hoped As in 2016, investment volumes for the Greater Paris Region have risen quarter on quarter since the beginning of 2017, although to a lesser extent. 4 billion was therefore invested over Q3 2017, taking the overall year-to-date investment volume to 9.4 billion. This volume may be 26% lower year on year, but remains 5% higher than the long-term average. In bn Total investment volume Decreases were seen across all market segments apart from for lot sizes from 100 to 300 million, although levels were lower in terms of lot size (-9%), there were more deals year on year with 24 transactions in 2017 (vs 22 over the same period last year) including 10 over Q alone. This market segment posted 3.5 billion in investments which equates to 38% of overall investments. Other market segments posted decreases ranging from -15% for small transactions to - 30% for lot sizes from 50 to 100 million. For the past several months, strong demand in these two segments has been confronted by a lack of product for all asset types. The shortfall is mainly due to the lack of mega-transactions as there has only been one transaction for a lot size in excess of 500 million recorded since the beginning of the year - NATIXIS acquisition of 50% of the share capital of the Duo towers from IVANHOE CAMBRIDGE - compared with three over the same period last year Q1 Q2 Q3 Q4 All segments combined, the number of transactions posted a year-on-year decrease with 194 transactions recorded over the last nine months, compared with 231 over the same period in The average lot size also decreased from 55 to 48 million. In bn Investment volume by deal size 0 Q1-Q Q1-Q Q1-Q < 50 M From 50 to 100 M From 100 to 300 M From 300 to 500 M > 500 M COPYRIGHT JONES LANG LASALLE IP, INC All rights reserved. 6

7 Paris and Western Crescent in the limelight The two most-established markets in the Greater Paris Region, Paris CBD ( 1.3 billion) and La Défense ( 380 million), both posted year-on-year decreases in performance with -50% and-78% respectively, following an exceptional year in This lower level of performance has mainly benefitted the Western Crescent (+9% year on year) which has seen almost 2.6 in investments since the beginning of the year - one of its best years on record. This activity was largely due to good performance in Péri-Défense ( 886 million, including 505 million in Nanterre) and the Southern Bend which with 982 million in investments, posted its best year on record. SFL s disposal of In/Out (the OECD headquarters in Boulogne-Billancourt), made a large contribution to these results. Next in line was Paris, excluding the CBD, which accounted for 2.5 billion (+54% year on year) including 1.3 billion over Q This performance was largely linked to NATIXIS 50% share-capital acquisition of the Duo towers project. In the Inner Suburbs ( 986 million), following a particularly active H1 for the Inner Southern Suburbs, the North was the focus of investments over Q3 with transactions including PRIMONIAL s acquisition of the SNCF FRET headquarters in Clichy. Following a timid start to the year, the Outer Suburbs were more active over Q with 491 million in investments thanks to three transactions for lot sizes over 50 million. This takes the year-to-date investment figure for the area to 938 million (+14%). Investments by geographic areas 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Q1-Q Q1-Q Q1-Q Paris CBD Rest of Paris La Défense Western Crescent Inner suburbs Outer suburbs Significant decreases for all asset types, except for offices Despite having posted a 23% year-on-year decrease, offices remain by far the most sought-after assets with just over 8.1 billion or 86% of investments. Due to a lack of opportunities, the investment volume for retail was far below the levels recorded in 2016 (-40% year on year) with only 900 million in investments since the beginning of the year and a market share of 10%. Logistics assets posted a similar level of decrease (-45%) with just over 280 million in investments over the last nine months. Finally, investments in industrial premises were marginal with barely 80 million. Investments by type of asset Q1-Q % 3%1% 86% Offices Warehouses Retail Light Industrial / Mixed COPYRIGHT JONES LANG LASALLE IP, INC All rights reserved. 7

8 Foreign investors less active every quarter Foreign investors were very active at the beginning of the year (52% of activity over Q1), but have been more subdued over the last six months. They have accounted for 2.3 billion in investments since the beginning of the year, equivalent to or 26% of activity. German investors were the most active ( 660 million or 7% of investments), followed by American investors (5%). They were however very active on the sell side with almost 3.5 billion in disposals since the beginning of the year. American investors led the pack with over 1.6 billion in disposals and were therefore net vendors. German investors were next in line with almost 585 million in disposals, while French investors carried out just over 5 billion of disposals. Driven by record levels of fundraising in 2017, SCPI and OPCI were top of the investor rankings by a wide margin with almost 3.8 billion in investments over the last nine months accounting for 40% of activity. Next in line were investment funds ( 2.2 billion) and institutional investors ( 820 million). Core assets had lost ground to other products over recent months, but are now back in favour with investors and have accounted for almost 53% of investments since the beginning of the year. Several major transactions contributed to these results. The remainder of activity was fairly evenly split between Core+ assets (22% of investments) and value-add assets (26%). There were fewer forwardfunded acquisitions (VEFA) over Q2, but these proved to be popular over Q3 with seven transactions (including five for offices) that accounted for almost 1 billion. Prime office yields remained stable in Paris over Q However, the wave of yield compression continued to travel across to the Western Crescent and the Inner Suburbs. Prime yields now stand at 3.25% in Neuilly-Levallois, 3.50% in the Southern Bend and 4.00% in the Inner Northern Suburbs. With the risk-free rate (OAT) at 0.748% at the end of September 2017, real estate remains attractive compared with other asset classes with a risk premium of 225 basis points. Risk premium 7% 6% 5% 4% 3% 2% 1% 0% Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q3 Q CBD office prime yield 10-year bond rate Source: JLL/Banque de France COPYRIGHT JONES LANG LASALLE IP, INC All rights reserved. 8

9 Outlook Economic recovery confirmed, but remains fragile Inflation - a long time coming Improvements seen in the global economic climate since the beginning of the year have continued and gained pace, driven in particular by a sharp upturn in international trade (according to the WTO, levels should rise by 3.6% in 2017 following a 1.3% increase in 2016) and recovery in manufacturing output and investment. The IMF has therefore confirmed its growth forecasts for 2017 and 2018 at 3.5% and 3.6% respectively. However, the OECD is advising caution, warning that business investment and international trade may have improved, but that levels remain too low to guarantee sound global growth and that salary increases have been too low, holding inflation at a low level. 5,0% 4,0% 3,0% 2,0% 1,0% 0,0% -1,0% -2,0% -3,0% -4,0% -5,0% Global growth Growth forecasts may have been revised up for the Eurozone and several countries, such as China and Japan, but the United States and the United Kingdom should see GDP increase at a slower rate than forecast for The American economy (2.1% in 2017 and 2018 instead of 2.3% and 2.5%) is likely to suffer from the effects of the recent severe storms as well as a less expansionist budgetary policy than forecast, whereas in the United Kingdom, following a marked slowdown at the beginning of the year, growth is only set to reach 1.7%n (-0.3%) this year - its lowest since In the Eurozone, GDP rose by 0.6% over Q2 2017, following 0.5% over Q1. These results were due to better performance from household consumption and investment, a positive foreign trade balance and unemployment reaching its lowest point since 2008 (9.1%). These encouraging results seem to indicate that growth for the year as a whole may be higher than forecast. The IMF is now forecasting a 1.9% increase for the Eurozone in 2017 (compared with 1.7% three months ago). The only cloud on the horizon is the inflation rate, which at 1.5% in September 2017, is struggling to rise. As a result, the ECB has announced shortterm changes to its quantitative easing programme, although there are no current plans tighten monetary policy. Source: Banque mondiale Growth in the Eurozone 5,0% 4,0% 3,0% 2,0% 1,0% 0,0% -1,0% -2,0% -3,0% -4,0% -5,0% Source: Banque mondiale COPYRIGHT JONES LANG LASALLE IP, INC All rights reserved. 9

10 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q There was also good news for France which posted 0.5% growth for the third consecutive quarter. The marked increase in exports (+3.1% following +0.1%) combined with a slowdown in imports and a slight increase in household consumption (+0.3% following +0.1%) have offset a marked slowdown in investments. The employment market also saw further improvement and the unemployment rate fell once again. At 9.5% in Q2 2017, unemployment is now back to 2012 levels. This good news has led to growth forecasts for France also being raised, with GDP forecast at 1.6% by the IMF and 1.7% by the BANQUE DE FRANCE, the government and the OECD. In this context, the French government announced its draft finance legislation for 2018 at the end of September which has the dual stated objective of reducing the French deficit and supporting employment growth. GDP in France (QoQ change) 0,8% 0,7% 0,6% 0,5% 0,4% 0,3% 0,2% 0,1% 0,0% -0,1% -0,2% -0,3% Source: Insee Improvements in the health of the economy are reflected in the Business Climate which for the last two months has been at its highest point for the last six years at 109 bps as well as a high level in the global index PMI Markit France (57.1 at the beginning of October). In addition, INSEE s turning point indicator, which stood at 0.9 in September, is showing that the economic climate is particularly favourable. Only householder confidence strays from this broadly positive landscape; placed at 108 before the summer, considerably higher than the longterm average (100), levels fell over Q to 101 basis points in September Business Climate Index Rental Market Demand remains solid in the large company segment and this leads us to believe that market activity should be strong towards the end of the year. Source: Insee, June 2017 With activity indicators and the business climate looking positive, we believe that the overall take-up volume is likely to be close to 2.5 million sq m for 2017 as a whole. Overall, prime rental values in the Paris CBD should increase by the end of the year. In terms of supply, more completions are due in 2017 than last year, although most of these have already been pre-let. As such, there will only be a low level of supply renewal. Given the strong levels of demand, immediate supply should continue to fall towards the end of the year and into COPYRIGHT JONES LANG LASALLE IP, INC All rights reserved. 10

11 Outlook Investment market Given the improving economic climate in France, results for the Greater Paris Region investment market since the beginning of the year have been disappointing. Investors who are facing high prices and confronting difficulties in reallocating funds into high-performing vehicles are holding on to their assets and this is limiting the number of opportunities in the small transactions segment. In addition, there is currently product for lot sizes over 200 million in the market, but the lead times for carrying out these projects are increasingly long and some that were initially scheduled for 2017 are now due to be completed in Given this climate, we therefore expect the full-year investment volume for the Greater Paris Region to stand at 16 billion. As inflation in the Eurozone is struggling to rise, the ECB has announced that is does not plan to tighten monetary policy over the short term. This point, combined with the strong levels of demand, lead us to believe that prime yields should remain stable over the coming months. With the risk premium and the prime rent close to their long-term averages, the JLL potential indicator, which analyses the capacity for value creation in the Greater Paris Region, remains stable in the balanced zone at 2.5. JLL potential indicator Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q Potential zone Balance zone Risk zone /Banque de France COPYRIGHT JONES LANG LASALLE IP, INC All rights reserved. 11

12 Paris rue La Boétie Paris T : +33 (0) F : +33 (0) Le Plessis-Robinson «La Boursidière» - BP Le Plessis-Robinson T : +33 (0) F : +33 (0) La Défense «Cœur Défense» esplanade Charles de Gaulle Paris La Défense Cedex T : +33 (0) F : +33 (0) Lyon 55 avenue Foch Lyon T : +33 (0) F : +33 (0) Saint-Denis 3 rue Jesse Owens Saint-Denis T : +33 (0) F : +33 (0) Marseille 21 rue de la République Marseille T : +33 (0) F : +33 (0) Bordeaux 16 cours de Tournon Bordeaux T : +33 (0) F : +33 (0) Lille 46 rue de Valenciennes Lille T : +33 (0) F : +33 (0) Contacts Virginie Houzé Director Research Paris T : +33 (0) virginie.houze@eu.jll.com Delphine Mahé Manager Research Paris T : +33 (0) delphine.mahe@eu.jll.com Manuela Moura Consultant Research Paris T : +33 (0) manuela.moura@eu.jll.com Jones Lang LaSalle 2017 Jones Lang LaSalle IP, Inc. All rights reserved. The information contained in this document is proprietary to Jones Lang LaSalle and shall be used solely for the purposes of evaluating this proposal. All such documentation and information remains the property of Jones Lang LaSalle and shall be kept confidential. Reproduction of any part of this document is authorized only to the extent necessary for its evaluation. It is not to be shown to any third party without the prior written authorization of Jones Lang LaSalle. All information contained herein is from sources deemed reliable; however, no representation or warranty is made as to the accuracy thereof.