The rise in rates and the construction boom reduce office prices

The slowdown in the economy and rising interest rates are putting downward pressure on office prices across Europe.

NewsEditor
NewsEditor
19 September 2022 Monday 09:59
5 Reads
The rise in rates and the construction boom reduce office prices

The slowdown in the economy and rising interest rates are putting downward pressure on office prices across Europe. In Spain, prices have already begun to fall by around 5%, pressured by the increase in the unemployment rate caused by the construction boom of recent years, which stands at 12.1% in the capital and 11 % in Barcelona.

In the first half of this year, 45,000 m2 of offices in Madrid and 88,000 m2 in Barcelona have been put on the market, but many more are finishing the works: 87,000 m2 in Madrid (25% of which are already committed) and 274,000 m2 in Barcelona (with 35% already pre-rented).

According to the consulting firm DWS, "prices may fall between 10% and 15% before returning to growth in the medium term, so that, over a ten-year horizon, our prospects for real estate returns are that they remain practically unchanged. changes," he says.

Real estate sources explain that the rise in financing costs has increased by 0.25 basis points the profitability that investors ask for to buy a building, since most of them are financial entities -such as investment or pension funds or insurers- that they must offer competitive returns to their investors. The higher return demanded by these investors forces them to reduce the purchase price of the property.

Eusebi Carles, capital markets partner of the Cushman consultancy

Lindy Garber, head of investments at the consulting firm CBRE Barcelona, ​​puts the increase in the yield or profitability demanded by investors in Barcelona at 10 basis points, especially in buildings in the city center or on the outskirts, up to 4% and 5.85% respectively. In Madrid, the consultant says that the rise is 0.25 points in secondary locations in the center and also outside the M-30, up to 4.25% and 5%.

The Spanish office market has recovered in recent months the levels of activity prior to the pandemic. In the first half of the year, CBRE points out, investment in offices in Madrid stood at 541 million euros, 12% below the average level of the last five years, while in Barcelona it reached 415 million, in line with the average of the last five years.

According to the consulting firm Savills, however, "the number of transactions has slowed down in July", as in the rest of the European capitals, which they attribute "to the fact that investors are more selective in the current context and the quality product that looking for in prime locations is scarce”.

The contracting of offices has also experienced a very good first part of the year. According to Cushman's data

A large part of the market activity is concentrated on the desire of companies to look for offices in better quality buildings, so that rents in class A/B buildings account for 73% of contracting in Barcelona and 71% in Madrid. Companies, Carles points out, are looking for spaces that better fit their corporate sustainability goals (ESG) and that attract employees back to the office. “We are beginning to see signs of polarization”, acknowledges Lindy Garber, so that buildings of lower quality, less sustainable or poorly located will have more difficulties to be rented or sold.

Barcelona can find an added difficulty due to the great weight of technology in hiring offices. These companies, hit hard on the stock market, are destroying jobs and closing some locations to reduce costs and ensure their viability.

In Barcelona, ​​in the first semester, the main lessor ceased to be the technological one and was the one of services to companies, points out the consulting firm CBRE. In this category, the most active were the operators of flexible workspaces, which after the stoppage of the pandemic are growing strongly again and rented 20% of the office space in the city.

With the recovery in activity in recent months, rents have also returned to pre-Covid levels. In the best buildings in the best areas of Madrid, renting an office costs 36 euros/m2/month, one euro more than at the beginning of the year. In Barcelona, ​​on the other hand, the maximum rent has remained stagnant since last year at 27.25 euros/m2/month.

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