office market in the greater paris region q3 2013

The office market in the Greater Paris Region – 3rd quarter 2013

Between light and shadow

The leasing market continues to slow, impacted by the sharp

drop in turnkey transactions.

Immediate supply continues to rise while new supply remains

contained.

Rents remain under pressure.

More than €7.9 billion has been invested since the beginning of

2013, an increase of 8% in a year.

Twenty transactions exceeding €100 million were recorded in the

first nine months of the year.

The key prime yield in the Central Business District is stable in a

range between 4.50 and 5.00%.

On Point • The office market in the Greater Paris Region – Q3 2013

Downturn in the leasing

market

At the end of Q3, the leasing market was down by 30% compared to

last year, with 1.3 million sq m of take-up in the Greater Paris

Region. This difference is no surprise since solely Q3 of 2012 was

exceptionally active, with the completion of transactions by the

Ministry of Defence (135,000 sq m in the 15th district), France

Télécom (70,000 sq m in Châtillon), Sanofi (50,000 sq m in Gentilly)

or Thalès (49,000 sq m in Vélizy).

As we already mentioned mid-year, large transactions are lacking

this year. The sharp drop in turnkey transactions, after two

exceptional years, has greatly impacted the 2013 results. Indeed, it

is interesting to note that the share of these tailor-made transactions

in take-up fell from 24% in 2012 (32% at end of September 2012) to

11% in 2013. In fact, although the drop in activity appears exposed

at the moment, in 2011 and 2012 leasing activity was "boosted" by

these specific major transactions.

There were no such transactions in 2013. But those, which have

long gestation times, are difficult to gauge in terms of a calendar

year. And then some companies, faced since mid-2012 with the

downturn in indicators and economic outlook, as well as a sluggish

national climate, have postponed their real estate projects, curbing

their ambitions or renegotiating their lease.

For two years the phenomenon of lease renegotiations has grown in

the Greater Paris Region. According to Jacques Bagge, Head of the

French leasing team at Jones Lang LaSalle, “One of the key drivers

of demand in the past two years, was looking for savings. This has

now halted, the companies whose sole motivation was to lower their

real estate costs being satisfied to renegotiate their leases with

landlords, careful to avoid the leasing vacancy in their assets.”

Ratio of turnkey transactions in the total take-up (yoy change)

Source: Jones Lang LaSalle

Macro-economic data as at Q3 2013 (yoy change)

2013 Yoy change

GDP (2nd quarter) +0.5%

Salaried employment (1st quarter) +3,594

Business climate (Sept.) 94

Source: INSEE

Greater Paris Region KMI’s Q3 2013 (yoy change)

Q3 2013 Yoy change

Total take-up 1,302,172 sq m

Immediate supply 3,758,000 sq m

Immediate vacancy rate 7.2%

Prime rent €705 /sq m/pa

Average 2nd hand rent €312 /sq m/pa

Source: Jones Lang LaSalle/ImmoStat/ORIE

32% 11%

1,848,000

1,302,000

0,0

0,2

0,4

0,6

0,8

1,0

1,2

1,4

1,6

1,8

2,0

Q3 2012 Q3 2013

In million sq m Turnkeys

Excl. turnkeys

The large turnkey transactions have been absent this

year, with 440,000 sq m missing


CBD and La Défense have experienced a good level of leasing

activity, despite the widespread drop

From a geographical point of view, activity has varied greatly from

one sector to another. In Paris, demand fell 23%. Although all the

Parisian markets are lagging behind, Paris Centre West and Central

Business District are resistant and have performed well. The

correction in leasing values today allows many companies to claim a

Parisian location, or around the capital, in traditional business

districts. Moreover, there are twice as many big deals as last year in

this sector: the largest transaction was the Tribunal de Grande

Instance (30,000 sq m) in the 17th district. Indeed, the institution will

move its entire workforce, currently on the Ile de la Cité, to the new

courthouse, which will be located in the Clichy Batignolles urban

development zone, by 2017.

In La Défense leasing activity also increased significantly, thanks to

a particularly active Q3 with, amongst others, the signatures of

ERDF in the “Tour Blanche” in Courbevoie (22,000 sq m), delivered

in early 2014, and Allianz in “Easy Building” in Puteaux

(11,500 sq m).

In the rest of the Western Crescent, performances were variable.

Neuilly-Levallois and the Northern Bend are having a good year. In

Q3 we particularly note the pre-let of “Unicity” (~35,000 sq m) by

Cetelem to Levallois, which should be delivered in 2016. The results

of the Southern Bend have been sustained through the partial pre-

let of the “City-Light” transaction in Boulogne-Billancourt by GE

(38,000 sq m), which is scheduled for completion in 2015.

In general, the abundance of quality supply in these outlying areas,

which are accessible and close to Paris, has attracted companies

that benefit from very attractive lease terms.

In the Inner and Outer Southern Suburbs, lettings have dropped

sharply, due to very large transactions signed last year in these

sectors, such as France Télécom in Châtillon (70,000 sq m), Sanofi

in Gentilly (50,000 sq m), Thalès in Vélizy (49,000 sq m), EDF in

Palaiseau (~30,000 sq m) or Casino in Vitry-sur-Seine (~25,000 sq

m) for Q3 alone.

Number of large transactions > 5,000 sq m (as at 3rd quarter of the year)

Source: Jones Lang LaSalle/ImmoStat

Take-up change by surface area (12 months change)


« Eqho » Tower - La Défense

35% 34% 42% 41% 42% 43% 45% 48% 48% 48%

38%

0,0

0,5

1,0

1,5

2,0

2,5

3,0

In million sq m

< 5,000 sq m> 5,000 sq m

© Fernando Javier URQUIJO


Take-up change as at Q3 2013 (split by sub-market)



The threshold of 3.7 million sq m available has been crossed

In one year, the stock of available office space will have increased

by 6%. Therefore, supply continues to rise and reached a new

milestone with more than 3.7 million sq m available, which

represents 7.2% of the Paris tertiary stock. However, the share of

new supply in immediate supply, although up this quarter, remains

contained at a much lower level than in 2009 (~30%) and

represented 22% of immediate supply at the end of Q3.

Most of the increases were concentrated in the west of Paris, a

market where new deliveries this quarter were particularly high: not

less than 140,000 sq m of projects delivered, including 80,000 sq m

in La Défense with the “Eqho” tower. Not surprisingly, vacancy rates

are trending upwards: 10% in La Défense and 13.6% for the

Western Crescent.

Supply also remains high in the Inner Southern and Inner Northern

Suburbs with vacancy rates around 10%. However, the Paris market

is still under supplied with a very low vacancy rate (less than 5%):

4.9% for the Central Business District.

Leasing values are under pressure

Key prime rents in the Greater Paris region are trending downwards

to €705/sq m in the Central Business District and to €510/sq m in La

Défense, given the scarcity of transactions at exceptional rent

levels. Moreover, it is interesting to note that in the Central Business

District there have only been a handful of transactions signed

exceeding €700 since the start of the year, a number four times

lower than last year during the same period.

Generally, rents are still under pressure, with a few exceptions. The

overall market remains well supplied. “Actual rents, which have

fallen sharply, should remain at low levels in the coming months,

with negotiating conditions still very advantageous for companies,”

commented Jacques Bagge.

Grade A ratio in the immediate supply > 5,000 sq m (split by market)

Immediate supply > 5,000 sq m Grade A ratio

Outer Suburbs 438,000 sq m 19%

Inner Suburbs 277,000 sq m 30%

Paris 115,000 sq m 13%

Western Crescent 621,000 sq m 44%

La Défense 306,000 sq m 66%


Immediate supply and vacancy rate change (by building quality)

Source: Jones Lang LaSalle/ImmoStat/ORIE

Immediate supply as at Q3 2013 (split by market)


24% 28% 26% 24% 20% 22%

0%

1%

2%

3%

4%

5%

6%

7%

8%

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

4,0

4,5

2008 2009 2010 2011 2012 Q3 2013

In million sq m Second hand supplyNew/Refurbished supplyVacancy rate

8%

10%

28%

10%

14%

30% Paris CBDParis (excl. CBD)Western CrescentLa DéfenseInner SuburbsOuter Suburbs


Vacancy rate as at Q3 2013 (split by sub-market) Source: Jones Lang LaSalle/ImmoStat/ORIE

Prime rent as at Q3 2013 (split by sub-market) Source: Jones Lang LaSalle/ImmoStat/ORIE


Outlook

Given the drop in activity observed at the end of Q3, take-up in the

Greater Paris region for 2013 is expected to be around

1.8 million sq m. The outlook for 2014 is more favourable given the

first signs of improvement in the global and national economy since

the summer. Thus, leasing activity should gradually recover from

mid-2014.

The available supply remains significant, especially in the suburbs,

even if certain new buildings, some of which have been vacant for

several years, have gradually found tenants following adjustments in

their leasing values. The arrival on the market of new projects, in La

Défense and in the Southern Bend in particular, should reinforce or

even increase market disparities. Therefore, some vacancy rates

may rise again in the coming months.

Indeed, although today speculative launches of real estate

transactions remain limited, most of these developments, currently

under construction and available for letting (~760,000 sq m in total),

are concentrated in western Paris (45%).

In this context, still favourable to tenants, landlords remain attentive

to the operational and financial constraints of companies, and will

not fail to take this into account in their proposals, in order to avoid

the leasing vacancy in their assets. Renegotiations should therefore

remain numerous. Companies, whose sole motivation is to lower

their real estate costs, often will prefer to stay put in their current

premises, thus limiting the risk to the workforce and cost of moving.

Projects under construction and available up to 2015 (spli by market)


2015 324,000 sq m

TOTAL

2013 - 2015

758,000 sq m 2013

58,000 sq m 2014

376,000 sq m

50,000

100,000

150,000

200,000

250,000

300,000

In sq m

Inner Suburbs Outer Suburbs

Western Crescent La Défense

Paris (excl. CBD) Paris CBD


Rise in the investment

market compared to last year

With €3.6 billion invested in commercial real estate in the Greater

Paris region in Q3, the investment market found its second wind

during the summer. In total, over €7.9 billion have been invested

since the start of the year, an increase of 8% in a year.

Sharp growth in activity in the segment of intermediate size

transactions

After a slight drop at the end of June, large transactions that were in

progress during the spring were completed on schedule during the

summer: they are the only three transactions worth more than €300

million signed since the start of the year. These are the sale to

PRIMONIAL of the “Adria” tower for €450 million in La Défense, that

of PREDICA of “Eco Campus” for €380 million in Châtillon, and the

sale of the “Sequana” tower to HINES (on behalf of a third party) in

Issy-les-Moulineaux.

In the end, 20 deals exceeding €100 million were signed at the end

of September, two more than last year.

We note again the very balanced nature of the Greater Paris Region

market this year with regard to the unit volume of transactions. 50%

of the amounts invested were on transactions of less than €100

million, with a particularly strong growth in activity in the

intermediate segment transactions (between €50 and €100 million).

There were 30 transactions recorded for over €2 billion, compared

to only 19 for close to €1.2 billion in the same period last year, i.e.

an increase of 67% in volume.

As for very large transactions, in excess of €500 million, they have

been down up until now. This trend may change in the coming

months because large portfolios are currently being negotiated.

Tour « Sequana » - Issy-les-Moulineaux

Macro-economic data as at Q3 2013 (yoy change)

Q3 2013 Yoy change

GDP +0.5%

ECB headline rate 0.50%

10-year-bond 2.342%

3-months-Euribor-rate 0.225%

5-year-SWAP-rate 1.26%

Source: INSEE / Agence France Trésor / euribor-rates.eu / Jones Lang LaSalle-Thomson Reuters

Greater Paris Region KMI’s as at Q3 2013 (yoy change)

Q1-Q3 2013 Yoy trend

Investment volumes €7,919 M

Average investment deal €51 M

Number of transactions of which over €100m

155 20

Prime office yield 4.50 – 5.00


The business district of La Défense gets its head above water with more than €750 million of

investment since the start of the year.


The Paris Inner Ring captured almost half of the capital

The three largest transactions recorded since the start of the year

having been completed in the Paris Inner Ring, Inner Paris did not

drain, as it usually does, the majority of capital.

More than €1.5 billion was invested in the Paris Inner Ring (“Eco

Campus” in Châtillon) and in the Western Crescent (“Sequana” in

Issy-les-Moulineaux) respectively.

The business district of La Défense continued its strong momentum

begun in the last quarter, with €758 million invested since the start

of the year (4 transactions).

Two transactions exceeding €100 million were recorded in this

market, and after the sale by IVANHOE CAMBRIDGE of the

“Pacific” tower for €228 million to TISHMAN SPEYER

PROPERTIES in Q2, TESTA sold the “Adria” tower to PRIMONIAL

for €450 million in Q3. 2013 is likely to be one of the best years

recorded on the La Défense market since 2008.

The “Eco Campus” sale boosted the forward funding market in

Q3

After a slow start to the year, the forward funding market picked up

in Q3 with a large-scale forward funding sale completed during the

summer. Thus, PREDICA purchased “Eco Campus” from NEXITY

and INTERCONSTRUCTION for €380 million. This transaction of

70,000 sq m of office space developed on behalf of FRANCE

TELECOM in Châtillon should be delivered in 2015.

The other forward funding sale of the quarter was the sale by BNP

PARIBAS REIM of the extension of “Moulins de Pantin” (13,000

sq m) to LA FRANCAISE for an amount exceeding €65 million. This

is half pre-let to BNP.

We note that a single unsecured transaction has been sold since the

start of the year, thus the share of unsecured forward funding sales

fell from 50% of transactions at the end of Q3 2012 to 17% at the

end of September 2013

Quarterly investment (in volume)


Investment split by individual lot-size as at Q3 2013 (in number of deals)


Investment volume as at Q3 2013 (by asset class)


1,44

3,51

2,4

4,77

12,12

7,92

0

2

4

6

8

10

12

14

2008 2009 2010 2011 2012 2013

In €Bn Q4Q3Q2Q1

+8%

68%

19%

11% 2% < €50 M

From €50 to €100 M

From €100 to €300 M

From €300 to €500 M

> €500 M


The market remains focused on the traditional players

French investors still largely continue to dominate the investment

market with 73% of amounts committed in the Greater Paris region.

Usually strongly present on volumes of less than €100 million, in Q3

they made up the majority of the largest transactions, as 2 of the 3

largest transactions in the quarter were acquired by the French

(“Eco Campus” and “Adria”).

However, we have seen the return of more opportunistic investors of

Anglo-Saxon origin such as HINES (“Perspectives Défense” and

“Sequana”) or BLACKSTONE (“Colisée III & IV” and a portfolio of

logistics warehouses) that have been positioned substantially in the

Paris market in recent months.

As for the Germans, they mostly bought retail assets or office

buildings in Inner Paris:

- DEKA purchased the commercial part of “T8” and “33 rue

Lafayette”,

- UNION bought “Les 3 Moulins” shopping centre,

- and PRAMERICA bought “118 Avenue des Champs Elysées”.

Stability of yields in all sectors

Investor appetite for “Core+” and “Value Add” products is confirmed,

although the supply of products is not yet sufficient. We note that the

pricing differences between sellers and buyers tend to be reduced,

providing greater liquidity in this market segment. Investor appetite

for the best products cannot be denied, with the prime yields

remaining unchanged despite rising rates of French treasury bonds

since the spring.

Thus, the key prime yield in the Central Business District is stable in

a range between 4.50 and 5.00%.

Forward funding ratio in the total office investment Q3 2013 (in volume)


Investment split by nationality as at Q3 2013 (en volume)


Prime yields as at Q3 2013 (split by sub-sector)


0,96 1,55 1,47 1,92 2,23 1,60 1,61 1,32 0,90 1,09 1,28 0

2

4

6

8

10

12

14

Q12011

Q22011

Q32011

Q42011

Q12012

Q22012

Q32012

Q42012

Q12013

Q22013

Q32013

In €Bn Offices's sales (excl. forward funding sales)Offices' forward funding sales


Outlook

According to Stephan von Barczy, Head of French Capital Markets

Group at Jones Lang LaSalle “Large transactions are currently

underway and acquisition teams are very busy. They must

undertake more substantial educational work with their committees,

slowing slightly the rate of completing transactions.”

As a result, we anticipate that the investment volume at the end of

the year will be in the range of €10 to €12 billion.

Sovereign funds that strongly led the market last year have hardly

been present on the market since the start of the year. However,

they have not deserted the market since two transactions, for

around €1 to €2 billion, are currently under negotiation.

As for the forward funding market, it should not end the year on an

equal to last year's level (around €1 billion), especially as investors

for unsecured transactions are still rare.

In terms of funding, although banks continue to dominate the

market, debt funds have effectively deployed a good part of their

funds and new insurers have emerged. Competition on margins

partly offsets the increases in rates, but overall funding costs have

probably reached a low point.

Consensus forecasts (as up to 2014)

September 2013 June 2014

GDP (year end)

10-year-bond

3-months-Euribor-rate

Source: Consensus forecasts – June 2013

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office market in the greater paris region q3 2013

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