SPOTLIGHT Market - Savills

Trends and outlook for the office letting market

Office Letting Market

SPOTLIGHT

Savills Research

France – Q1 2021

Building «Network», Bagneux - © Stefan Tuchila

In Q1 2021, office take-up in Île-de-France stood at 327,500 sqm. Despite a year-on-year drop of 30%, it seems that the lettings market is emerging from its slumber.

Major occupiers have taken heart since 2020, closing 13 deals for a total volume of 115,000 sqm.

Meanwhile, the influx of immediate supply has kept on coming. By the end of the quarter, vacancies were pushing 3.8 million sqm (up 30% year-on-year), bringing Île-de France’s vacancy rate to 6.9%.

For the moment, prime rents are holding steady at the upper end of the scale. Conversely, rental values for existing property are wilting all across the region.

-30%annual trend

On the pandemic front, multiple unknowns remain – not least the threat posed by new variants. This makes the immediate economic outlook far trickier to read. That said, most forecasters agree that France can look forward to a vigorous economic rebound in 2021. Following 2020’s wincingly sharp contraction in GDP (8.2%), France should make speedier progress than either the Eurozone as a whole or the UK. The Bank of France would appear to concur, having upgraded its 2021 growth forecast to 5.5% in mid-March.

These projections, released just before the French government announced the latest round of pandemic restrictions at the end of March, strike a note of caution for Q1 2021 and distinct optimism for the second half of the year. So, there’s a lot hanging on the ongoing fight against COVID-19.

The upswing should be apparent across the board, affecting investment, consumption and international trade.

Some of the losses chalked up during the crisis will no doubt be recouped, but not enough to fuel significant job creation. We can therefore expect climbing unemployment, peaking at some point during 2021. However, the situation is likely to be less alarming than previously suggested (affecting 9.5% of the active population, rather than the 10.5% predicted until now).

The economy should continue to rev up over 2022 (+4%) and 2023 (+2%), albeit in fits and starts, bringing France back in line with the Eurozone average. If all of these predictions bear out, companies will be in a renewed position to think about their future workspace needs: good news for the lettings market.

ECONOMIC CLIMATESTAGGERED RECOVERY

Unemployment rate (forecast to end

2021)

9.5%

5.5%

French GDP growth estimated

for 2021

IN BRIEF: WHAT’S BEEN HAPPENING IN THE MARKET?

+30%annual trend

3,787,000 sqmImmediate supplyin Ile-de-France

5,3%one year ago

6.9%Vacancy rate in Ile-de-

France

10 transactions last year

13Transactions > 5,000 sqm

since January 1st

327,500 sqmTake-up

in Ile-de-France since January 1st

2savills.com/research

Spotlight - Offices - Q1 2021

These stirrings remained faint at the close of Q1 2021, but did appear to be spreading, particularly in the major transactions segment. Our impressions of the early part of the year may therefore seem to support the first whispers of a stabilisation, perhaps even a resurgence. Yet, such optimism, cautious as it may be, is not supported by recent market data. In fact, take-up in Île-de-France is down 30% y-o-y, with almost 327,500 sqm let in Q1 2021. The downward trend in the market is evident across all space categories: -15% for small lettings (<1,000 sqm), -25% for medium-sized spaces (between 1,000 to 5,000 sqm) and -44% for large lettings (>5,000 sqm).

Perhaps we should manage our expectations: a number of indicators are back in positive territory and that alone is a cheering sign of market resilience. The first thing to bear in mind is that take-up for Q1 2020 was bulked up dramatically by Total’s lease of 126,000 sqm in The Link. If this outlier is ignored, the year-on-year slump observable in the Q1 2021 figures is much less pronounced. Instead of -30%, we end up on -4% – we might almost call that “stable”. This is even clearer if we hone in on the major transactions segment.

Second, looking at the composition of the market in Île-de-France, there are two things that jump out. Activity is still being driven by small-scale transactions – this segment is more structurally stable than the rest and seems pretty resilient, accounting for 40% of total take-up. Although demand from smaller companies has waned, falling 15% in the space of 12 months, it’s still the primary mover of the office market and vital to its performance.

Meanwhile, an upward trend in major transactions activity, first apparent at the end of 2020, has only steepened.Thirteen major deals were completed over the course of Q1 2021, amounting to a total volume of almost 115,000 sqm. That holds up well against the ten transactions recorded in the same period of 2020, with a combined volume of 204,000 sqm.

This positive news shines all the brighter given that this time around there was no supersized deal to bump up the figures – just a series of regular transactions for spaces in the 5,000–

10,000 sqm bracket and a few of up to 28,000 sqm. Judging by provisional research findings, this trend may have some way to run.

All the same, most areas of Île-de-France are trending in the opposite direction, i.e., down. The only exceptions are the Western Crescent and Outer Suburb; here take-up has grown by 35% and 41% respectively.

To the west, more outlying areas have made something of a comeback thanks to growing demand from major occupiers: six transactions were recorded in these locations in Q1 2021, compared with two in the same period of last year. The town of Meudon (Western Crescent/South End) was the outright winner, thanks to Altran Technologies and Vallourec grabbing the last remaining spots in M-Campus (for a total of 15,000 sqm). There’s been quite a bit of movement in the North End as well: the Smile group leased 5,000 sqm in the Front Office building in Asnières-sur-Seine, while Energies France plumped for 5,500 sqm in the Clever building in Gennevilliers.

Take-up: LacklustreA little over a year ago, on 17 March 2020 – day one of France’s first national lockdown – the Île-de-France office lettings market was hit with an unprecedented shock from which it still struggling to recover. Towards the end of 2020, a general sense of lassitude hung over the market, and yet there was a glint of hope as activity seemed to rally...

0

500

1 000

1 500

2 000

2 500

3 000

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Variation in take-up in Île-de-France

Legend: Q1 Q2 Q3 Q4

Ten-year average:2,268,967 sqm

40%Transactions > 5,000 sqm

25%

Transactions 1,000 - 5,000 sqm

Transactions < 1,000 sqm

35%

Take-up by floorspace segment in Île-de-France

Source Savills Research - Immostat


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A market on the mend

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Meanwhile, the completion of a number of deals in the >5,000 sqm segment injected a bit of life into the Outer Suburb market, although it’s still far too early to speak of a recovery. That’s because the performance of this market was buoyed up by two particular deals, including the lease of 28,000 sqm at the Dassault Systèmes campus in Vélizy-Villacoublay. This transaction dropped into the 2021 figures after conditions precedent were waived, but the deal itself dates back quite some time. Like The Link deal in La Défense a year ago, it is liable to

skew our reading of the market in the South Outer Suburb.

As for Paris itself, here take-up is down by 21%. The city centre saw just two transactions involving space of over 5,000 sqm, both in the CBD, combining to a total of 15,000 sqm. The lessees in question were a financial institution and the French video game developer Voodoo. The mid-sized transaction segment is also struggling, posting a year-on-year slump of 20%. Most market action is centred on small-scale deals (60%).

At 77,200 sqm, take-up in this segment was actually 3% higher than this time last year.

La Défense also saw a sharp drop in take-up (down 86% y-o-y). There was just one major deal – 11,600 sqm in Carré Michelet à Puteaux – to bring a flicker of energy to this fairly uninspiring quarter. But beware of unfair comparisons: figures for early 2020 were unusually strong, boosted by the Total deal. For small and medium-sized offices, take-up is also trending downwards (-18% and -38% respectively). This major business district is still failing to live up to its potential, having posted a total take-up of just 21,000 sqm. There may be an opportunity to regain some ground in the next few months, if a series of major deals, currently under negotiation, come through as expected.

The Inner Suburb looks to be one of the hardest-hit areas in terms of the fallout from the pandemic: lettings activity has fallen 39% in the last 12 months. However, this figure masks a great deal of variation between submarkets. The East Inner Suburb has pulled ahead of the pack, with activity up 42% year-on-year. This relatively strong performance is partially attributable to a major deal for 5,000 sqm in Fontenay-sous-Bois, let to BPI. The North Inner Suburb fared less well (down 35% year-on-year). The most resounding crash has been noted in the South Inner Suburb, where barely 3,000 sqm found a taker in Q1 – that’s a year-on-year drop of 82%. Prior to the current crisis, the prevailing winds were blowing in this market’s favour, but COVID-19 seemed to throw up a wall that is still blocking its recovery. Major occupiers, traditionally the main drivers of activity in this market, have drifted towards other outlying locations across the region.

Immediate supply: A year of plentyImmediate supply began to rise in Île-de-France in early 2020, consolidating further over the past four quarters.

At the end of Q1 2021, close to 3.8 million sqm was lying vacant across the region (+30% y-o-y, +3% q-o-q). We would have to rewind a whole five years, to early 2016, to find levels that high. Most of this excess space can be put down to new construction (+58% year-on-year, versus +23% for vacancies in existing supply). Consequently, the share of Grade A supply was bulked up by 24% in Q1 2021, reaching a total volume of 922,000 sqm.

So much for the traditional office market – but what about flexible workspace and so-called “grey” (i.e., sublet) space? These two phenomena are particularly rife in central Paris, where grey space is rapidly gaining ground. However, its market share is not easy to quantify. As long as the market environment remains so uncertain,

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Variation in immediate supply in Île-de-FranceLegend: Second-hand New or refurbished Vacancy rate

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Q1-

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Take-up by geographical area and floorspace segment

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Legend: < 1,000 sqm 1,000 - 5,000 sqm > 5,000 sqm y-o-yChange

Paris La Defense Western Crescent

Outer Suburb

Inner Suburb

-21%

-86%

35%

-39%

41%

6,9%



Immediate and future supply in Île-de-France Legend:

Immediate supply Excepted in 2021 Excepted in 2022 Excepted in 2023

such solutions will be a welcome option for businesses, offering many benefits in terms of flexibility, added services and rental cost trimming.

This rebound in immediate supply is not curtailed to a single submarket, but is occurring practically everywhere in the region. Vacancies have virtually doubled in Paris as a whole (+89%), but ground zero seems to be the CBD, where available space has now hit 263,000 sqm (up a prodigious 150% year-on-year). It’s the same picture in the Western Crescent (+19%) and the Inner Suburb (+30%). La Défense, too, is awash with vacant space (+110%). Only speculative developments in the Outer Suburb are resisting this trend at present.

As more space has come onto the market, the region’s average vacancy rate has reached 6.9% – arguably still reasonable by historical standards. While supply has risen more or less everywhere, there is much variation between submarkets. Undersupply remains an issue in Central Paris (with a vacancy rate of 4.6%), while more outlying areas have a bit more breathing space: the vacancy rate in the Inner Suburb came in at 8.6%, while the Western Crescent is sitting on 12.2%. The region’s highest vacancy rate was recorded in Péri-Défense (Western Crescent), where available supply now accounts for 18% of total stock.

For now, there are certainly no signs that undersupply is becoming a generalised problem in Île-de-France. But... the COVID-19 crisis is not over. There will undoubtedly be many more changes in the office market to come, as occupiers reassess their workspace needs, gravitate towards mixed-use formats and continue to operate with a remote workforce. As time goes on, it could become more and more difficult for empty offices to find tenants.For this reason, some owners are now exploring the options for a change of use. Thus, an aging office block might be reborn as residential apartments, serviced housing or a mixed-use developments. Up until now, France has not seen very many of these kinds of conversions, but investors are pricking up their ears and interest may well heighten over the coming months.

-3.8%

Immediate supply by geographical sector


Outer Suburb

Inner Suburb

Legend: Offre immédiate au T1 2020 Offre immédiate au T1 2021

+89%

+110%

+19%

+30%

-2%

y-o-y Change

sqm


Vacancy rate by geographical sectorParis La Defense Western Crescent Inner Suburb Outer Suburb

8,6%

11,2%

4,6%5,3%

12,2%

3,787,000 sqm

541,500 sqm

796,500 sqm

625,000 sqm

5


-3.8%

1 Hopes of a strong economic recovery in 2021

have been dampened by the unrelenting mutability of the global pandemic. As far as the real estate market is concerned, the anticipated bounce in lettings activity in 2021 seems likely to disappoint, with take-up clipped at around 1.5–1.6 million sqm.

2Available supply will swell further over the

rest of 2021 – an inevitable result of a fresh influx of new space, blueprinted in more bullish times, combined with plummeting pre-sales and lettings activity. Still, we cannot attribute this bounty to a struggling market alone; new space, in particular, is being left on the shelf for longer than it would have two years ago. Over the medium term, however, this extra margin of higher-quality stock will be a real asset as the horizon finally begins to clear.

3In terms of rental prices, there is a good chance

that the very marked divergence between new and existing space will persist for another few months. The landscape will remain highly differentiated by geographical area and property type. There are some faint signs of stabilisation on the horizon that may become clearer as the months go by. That’s how we’ll know that the recalibration of the Île-de-France market is almost complete, and a return to “normality” imminent.

SO WHAT’S NEXT?

In a market environment where supply is increasingly plentiful (+30% year-on-year) and transaction activity on a downward slide (-30%), rental prices for existing property edged south in Q1 2021, with some areas managing to stay on an even keel. Almost everywhere in Île-de-France has experienced rent contraction to some extent, including the Paris CBD (down 3% year-on-year).

Market values have not been too badly affected – the concessions are hiding in the various support measures offered to tenants. Across Île-de-France, the average tenant had benefited from concessions equating to 23% of rent by the end of Q1 2021. There was, however, a great deal of variation depending on the submarket (from 12.5% in the CBD to 29.1% in La Défense), the quality of the property, surface area and lease period. Those negotiating major deals (>5,000 sqm) were still the most likely to secure a substantial rent-free period.

All the same, prime rents are still perfectly healthy, particularly in the most sought-after

locations. A high-quality space in a coveted location will still command a lofty price: the average prime rent in the CBD remains upward of €930 per sqm per year.

This degree of polarisation began to weigh in occupier choices over the first three months of the year. Most major companies have tightened up their budgets, starting with real estate costs. That is why take-up of larger spaces has been proportionally greater in more outlying areas. These occupiers have been quick to pinpoint the Western Crescent and the Inner Suburb as more affordable alternatives to a central location. Only two firms took on space in central Paris in Q1 2021 – both in fast-growing industries with high added value, both opting for the iconic Poste du Louvre, fresh from a high-profile remodel by Dominique Perrault.This leads us to suspect that Paris’s outskirts may be poised for something of a revival.

Rents: Diverging fast The gap between Grade A and existing space is spreading rapidly.

Letting values by geographical sector


Outer Suburb

Inner Suburb

Legend: Prime rent Q1 2021 - Q1 2020Average rent Q1 2021 - Q1 2020

€/s

qm

/yea

r




Cyril RobertDirector Of Research Department+ 33 1 44 51 17 [email protected]

Emilie RentéAnalyst+33 1 44 51 50 [email protected]

Research

Savills plc: Savills plc is a global real estate services provider listed on the London Stock Exchange. We have an international network of more than 600 offices and associates throughout the Americas, the UK, continental Europe, Asia Pacific, Africa and the Middle East, offering a broad range of specialist advisory, management and transactional services to clients all over the world. This report is for general informative purposes only. It may not be published, reproduced or quoted in part or in whole, nor may it be used as a basis for any contract, prospectus, agreement or other document without prior consent. While every effort has been made to ensure its accuracy, Savills accepts no liability whatsoever for any direct or consequential loss arising from its use. The content is strictly copyright and reproduction of the whole or part of it in any form is prohibited without written permission from Savills Research.

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Cover: Photograph by Stefan Tuchila

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