CBRE REERC GLOBAL GATEWAY

1© 2017 CBRE, Inc.

G L O B A L

C I T I E SGATEWAY

CBRE RESEARCH

APRIL 2017

EUROPE

EUROPE

TABLE OFCONTENTS

INTRODUCTION ............... 04

EUROPEOverview ........................... 06Frankfurt ........................... 12London ............................. 12Madrid .............................. 16Milan ................................ 20Munich ............................. 24Paris ................................. 28

METHODOLOGY ............... 32

4 5© 2017 CBRE, Inc. EUROPE

INTRODUCTION

We live in an age of cities. In emerging markets, they are hubs of explosive growth in production and distribution facilities. In the developed world, where the service sector

drives economic activity, cities have reinvented themselves as vibrant live-work-play destinations. Millennials continue to flock to cities to work in the highly dynamic sectors of tech, fashion and high finance.

Nowhere is the spirit of the age better embodied than in the world’s great gateway cities. These are, as the name suggests, world-class transport hubs. They are networked into the global economy via their ports and airports, and to their hinterlands via road and rail networks. They are large, important markets in their own right. They have highly diversified economies with many sectors and subsectors, which, alongside their entrepreneurialism, makes them highly resilient to the ebb and flow of economic events. London and New York took hits during the Great Recession, but they were not down for long.

The global gateway cities are centers of learning, culture, the arts, music and fashion. They have world-class retail facilities featuring major international brands, but also a wide selection of boutique and independent retailers. Their central business districts, with extensive stock of modern offices, host national and regional corporate headquarters and the legal, accountancy and consulting services these require.

From a real estate perspective, global gateway cities offer many benefits. First and foremost, their attractiveness to people and businesses means that space demand in their commercial real estate markets increases steadily over the long term, underpinning rent growth. They are also highly liquid markets, where real estate assets can be readily bought and sold. Some investors do trade regularly, playing the cycle, which they are able to do thanks to these markets’ high transparency. With competitive markets for real estate advisory services, the advice is good and the cost of transacting is low. Other investors like to deploy capital over the long term: real estate in the global gateways provides good capital protection and, in this era of low bond rates, a good income return. Lot sizes vary from small to huge, so large sums of capital can be deployed if necessary.

We have compiled the second edition of this report so that those looking to invest in one or more of the world’s great cities can quickly and easily understand pricing and market conditions using the most up-to-date information available. We look forward to your feedback, and, more importantly, to working with you to fulfil your chosen investment strategy.

Richard BarkhamGlobal Chief Economist


G L O B A LG AT E W AY C I T I E S

PARIS

LONDON

MUNICH

FRANKFURT

MADRID

MILAN

4.046 3,840 €/sq. m. 3.5376

3.8139 2,225 £/sq. ft. 2.31,733

4.033 2,530 €/sq. m. 3.4275

3.848 6,000 €/sq. m. 3.3588

3.241 4,800 €/sq. m. 3.1471

3.079 21,000 €/sq. m. 2.91,297

Office Retail Source: CBRE Research, 2017.

MUNICH

LONDON

PARIS

MADRID

MILAN

FRANKFURT

MUNICH

LONDON

PARIS

MADRID

MILAN

FRANKFURT

Europe

Notes: Local currency unit (LCU) rents are denoted in LCU per annum. Rents in U.S. dollar are as of Q4 2016 market rates (please see the conversion rates in the methodology section). All Office rents are denoted as Prime/Class A building rents for the best location in a given market. All Retail rents are based on the achievable rent which an international retailer is willing to pay for an up-to 200 square meter gross retail unit in the best location of a given market (according to CBRE's Global Prime Retail Rent publication). For global comparison we incorpo-rate an ITZA conversion for London and Paris retail.

Office Rents (LCU)

474 €/sq. m.

113 €/sq. ft.

339 €/sq. m.

490 €/sq. m.

414 €/sq. m.

810 €/sq. m.

Office Rents (US$)

OfficeYields (%)

Retail Rents (LCU)

Retail Yields (%)

Retail Rents(US$)


Positive conditions in the investment market and nervousness surrounding the outcome of Brexit negotiations in the U.K. will continue to favor investment activity in Frankfurt.

Lack of supply in core areas will mean that investor focus will broaden from properties in the core and core-plus segments, to properties located outside the central districts in the

value-added segment.

ECONOMIC TRENDS

OCCUPIER TRENDS

-9

-6

-3

0

3

6

2005 2007 2009 2011 2013 2015 2017

Germany GDP Germany ForecastFrankfurt GDP Frankfurt Forecast

Real GDP Growth (%)

Source: Oxford Economics, CBRE Research 2017.

Office Vacancy (%)

12.1 11.1

Q4 2016Q4 2015Source: CBRE Research, Q4 2016.

German GDP growth in 2016 was 1.9%, the highest annual level in the past five years. The forecast for economic growth in 2017 is below that of 2016. The upcoming general election, potential adjustments of inflation and interest rates policy will be important factors determining growth. Economic growth will continue to be driven by private consumer spending, which depends on interest rates, the strength of the labor market and levels of public spending and capital formation. At 1.8%, Frankfurt’s GDP growth matched the national rate and is expected to reach 1.9% this year. A strong labor market will underpin growth, and there are hopes that the U.K.’s exit from the European Union will cause companies to relocate to Germany’s financial capital.

Leasing activity in Q4 2016 by far exceeded that of the previous three quarters and resulted in total annual leasing activity of 546,400 sq. m.—the best annual performance since 2007. A significant share of this was attributable to transactions in the 5,000+ sq. m. category, which accounted for 32% of the total take-up volume. The most active sectors in terms of take-up were unchanged, with the majority of take-up attributable to the banking and financial services. Due to a total of 187,500 sq. m. of obsolete office space being removed from the market in 2016, the vacancy rate fell by 10 basis points to 11.1%.


SUPPLY TRENDS INVESTMENT ACTIVITY

YIELD TRENDS

3

2

4

5

6

7

Retail Yield Office Yield

Q4 20

05

Q4 20

06

Q4 20

07

Q4 20

08

Q4 20

10

Q4 20

11

Q4 20

12

Q4 20

13

Q4 20

15

Q4 20

16

Office and Retail Yield TrendsYield (%)

Source: CBRE Research, Q4 2016.

0

1,000

2,000

3,000

4,000

5,000

7,000

6,000

2008 2009 2010 2011 2012 2013 2014 2015 2016

Foreign Domestic

(US$ Millions)

Source: Real Capital Analytics, CBRE Research, Q4 2016.

Office and Retail Investment Activity0.02 MSMNew Office Completions

0.35 MSMOffice Space Under Construction


Frankfurt registered 179,200 sq. m. in office completions last year, slightly below the 10-year average of 186,100 sq. m. Approximately 167,000 sq. m. of office space will be completed in 2017, of which 60% has been preleased. Another 132,800 sq. m. is expected to complete in 2018, of which 43% is preleased. Due to the high proportion of preleasing, vacancy is not expected to rise with the addition of new space, and pressure on prime rents should increase. Of the 2017-to-2019 pipeline, 50% will be developed in the central business district (CBD). This rises to 72% if the neighboring submarkets (Railway Station District, Frankfurt East and Trade Fair / Europe District) are included, indicating the continued desirability of central-city areas for occupiers.

RENT TRENDS

Total transaction volume of $5.7 billion (€5.3 billion) in the Frankfurt investment market last year was the highest annual total since 2007, largely due to a strong fourth quarter. While the market was dominated by opportunistic investors during the last cyclical high point, the current cycle is characterized mainly by equity-strong core investors with long-term investment strategies. The strongest sector in 2016 was offices, which accounted for around 81% of total transaction volume. This dominant position was mainly driven by a number of transactions in the €100 million+ category.

Downward pressure on prime office yields continued in 2016, causing a 40-basis-point shift over the course of the year. The lack of product in the CBD resulted in greater interest in city fringe locations, where yields fell by 10 basis points in Q4 to their current level of 4.70%. Strong demand relative to supply also resulted in yield compression in the other asset classes: The yield for top-quality retail properties in city-center locations at year-end was 3.50%, a fall of 40 basis points from Q4 2015, due to continued strong demand from investors.

Q4 20

05

Q4 20

06

Q4 20

07

Q4 20

08

Q4 20

09

Q4 20

10

Q4 20

11

Q4 20

12

Q4 20

13

Q4 20

14

Q4 20

15

Q4 20

16

90

95

100

105

110

115

120

110

100

90

80

120

130

140

150

160

170

Office Index Retail IndexOffice and Retail Rent Trends

Retail Index Office Index Source: CBRE Research 2016.

Despite high demand in Q4 2016, prime rents in the CBD remained unchanged at €39.50 per sq. m. per month. However, the weighted average rent rose by 5.7% compared with the previous quarter to its current level of €19.09 per sq. m. This was due to a large number of deals in the central and highly priced submarkets, such as the lease by Zurich Group of about 17,500 sq. m. in the Banking District. Prime retail rents have stayed flat since 2013.


-6

-3

0

3

6

9

2005 2007 2009 2011 2013 2015 2017

UK GDP UK ForecastLondon GDP London Forecast

Real GDP Growth (%)


London is the largest, most transparent and liquid investment market in Europe. There are few barriers to new entrants and, historically, transactions in all lot sizes are available at most times. Despite certain specific political and economic risks, the fundamentals of the

market remain well supported.

ECONOMIC TRENDS

OCCUPIER TRENDS

2.304.15

Q4 2016Q4 2015

Office Vacancy (%)


Forecasts for economic growth were downgraded significantly following the vote to leave the European Union. However, the economy has outperformed predictions, with U.K. GDP growing by 2.0% in 2016. Overall, CBRE Research expects moderate economic growth of aproximately 1.6% this year, with reduced consumption and lower investment volume, but improving export performance against weaker imports. The London economy is expected to continue outpacing that of the country as a whole, with London GDP forecast to grow by 2.0% in 2017 and 1.7% in 2018. London unemployment is at a historic low, resulting in expectations of less job growth in 2017. Longer term, London will benefit from a new major rail link, Crossrail, which will open in 2018.

Take-up for 2016 was 12.2 million sq. ft., down 21% on 2015 due to subdued activity in Q2 and Q3 around the refer-endum vote. Although take-up picked up in Q4, it is likely to trend downward as low levels of under offers translate into weak take-up. Demand will continue to be fed by lease events; however, we are likely to see further migration of West End occupiers eastwards in search of better value. Occupiers from financial services, creative industries (technology, media and telecom) and business services will be the main sources of future office demand. We expect creative industries occupiers to continue expanding into the non-traditional office areas of London, with the Southbank—particularly the new development at Battersea/Nine Elms—holding great appeal due to improving transport links and relatively cheap rents.



YIELD TRENDS

2

3

4

5

6


Q4 20

05

Q4 20

06

Q4 20

07

Q4 20

08

Q4 20

09

Q4 20

10

Q4 20

11

Q4 20

12

Q4 20

13

Q4 20

14

Q4 20

15

Q4 20

16



0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

45,000

40,000

2008 2009 2010 2011 2012 2013 20142007 2015 2016

Foreign Domestic

(US$ Millions)


Office and Retail Investment Activity

1.8 MSFNew Office Completions

12.5 MSFOffice Space Under Construction


The Central London office vacancy rate stood at 4.2% at year-end 2016, still below the long term average but 61 basis points up on the previous quarter. This is likely to be mitigated by below-average completion rates, with only 4.3 million sq. ft. of completions in 2016. The rate of development completions will pick up as 12.5 million sq. ft. is currently under construction in Central London. However, 32% has been preleased or is currently under offer. Looking ahead, the supply pipeline is uncertain as developers reassess the market due to political uncertainty and construction cost inflation.

RENT TRENDS

Central London office investment in Q4 2016 totaled $6.2 billion (£4.9 billion), a large increase on the weak levels seen in the previous quarter. This represents the largest investment turnover total since the corresponding period in Q4 2015, signifying an uptick in sentiment after the negativity in the im-mediate aftermath of the EU referendum result. Overseas investors accounted 70% of the turnover in Q4 at $4.9 billion (£3.9 billion), a significant increase from the $2.7 billion (£2.1 billion) invested by foreign buyers in Q3 2016. Among foreign buyers, Asian investors were the most active (25%) followed by Middle Eastern investors (24%). Property companies (8%) were the most active domestic investors. Retail investment in London weakened in Q4 after a very active Q3, with just $778 million (£662 million) transacted. Almost 75% of Q4 retail investment was accounted for by one deal by Norges.

Central London office yields remained steady from Q3 to Q4 2016: prime yields stayed at 3.75% in the West End and at 4.25% in the City. Although increasing from Q2, office yields are still relatively low. Despite uncertainty in the market, pricing continues to be supported by the strong weight of capital flowing in from Asian investors. Prime retail yields remained at 2.25% for Bond Street and 2.5% for Oxford Street. Strong pricing continues to be driven by overseas buyers, who were responsible for 80% of purchases by volume in 2016.

Q4 20

05

Q4 20

06

Q4 20

07

Q4 20

08

Q4 20

09

Q4 20

10

Q4 20

11

Q4 20

12

Q4 20

13

Q4 20

14

Q4 20

15

Q4 20

16

100

90

110

120

130

140

150

160

170

140

90

190

240

290

340

390

440

490



London has five main sub-markets: the West End, Midtown, City, Southbank and Docklands. Office rent growth has been relatively strong in the recent past, growing by 4.5% per annum in the City and 6.5% per annum in the West End between 2011 and 2015. Prime rents at year-end 2016 stood at £70.00 per sq. ft. in the City, and £112.50 per sq. ft. in the West End. Prime rents fell in the core West End from Q3 to Q4 from £120.00 per sq. ft. to £112.50, and also in Midtown, reflecting lower levels of take-up in 2016, but remained unchanged elsewhere. However, rent decreases in the West End and Midtown are likely a lead indicator of headline rent decreases across other Central London markets in 2017 and 2018. Extended rent-free periods and greater flexibility in lease terms will moderate these decreases. Negative annual-ized growth of -0.6% in the City and -1.2% in the West End is forecast for 2017 to 2021, although by 2020 a gradual recovery in rents is expected in most markets. Prime retail rents are at an all-time high of £2,225 (ITZA) and are set to grow by an average of 2% in the next two years.


ECONOMIC TRENDS

OCCUPIER TRENDS

-6

-3

0

3

6

2005 2007 2009 2011 2013 2015 2017

Spain GDP Spain ForecastMadrid GDP Madrid Forecast

Real GDP Growth (%)


15.912.5

Q4 2016Q4 2015

Office Vacancy (%)


Spain’s GDP is expected to grow by 2.5% in 2017 and by 2% in 2018. Fueled by the recovery of the job market, growth is mainly being driven by private consumption. For the first time since 2010, the Spanish unemployment rate dipped be-low 20%, reaching 18.6%. Madrid is expected to be the country’s leading contributor to forecast GDP growth of 2.9% in 2017 and 2.3% in 2018. The region has experienced years of strong job creation and is growing as a tourist destination, receiving around 9.5 million visitors in 2016.

After a record-breaking year in 2015, office sector activity softened last year. This was partially due to political instability in the first 10 months of 2016 when the political parties were unable to form a government. Following a settlement of government in October, office activity picked up again and the top-three leasing transactions of 2016 were all signed in the fourth quarter. The business services, manufacturing and energy sectors are currently the leading participants in the market. Tenants remain cost-conscious, which is their main decision-making factor in whether to lease new space or remain in current accommodation. But technical specifications and access to public transport and amenities are, as always, also high on the agenda.The recent sale of Madrid’s Xanadú shopping center for a record-breaking figure of

€530m (over $570m) demonstrates a high level of investor confidence in the city. With prime rent levels set to continue on a path of cyclical recovery, 2017 is forecast to be a

strong year for investment.



YIELD TRENDS

2

3

4

5

6

7


Q4 20

05

Q4 20

06

Q4 20

07

Q4 20

08

Q4 20

09

Q4 20

10

Q4 20

11

Q4 20

12

Q4 20

13

Q4 20

14

Q4 20

15

Q4 20

16



0

1,000

2,000

3,000

4,000

5,000

6,000

8,000

7,000

Foreign Domestic

(US$ Millions)



2008 2009 2010 2011 2012 2013 20142007 2015 2016

0.16 MSMNew Office Completions



No new office projects were completed last year. However, 158,143 sq. m. were refurbished, mainly within the city center. Some 313,600 sq. m. are currently under construction or refurbishment and are expected to complete in the next two years. The high overall vacancy rate of 12.5% has suppressed levels of new supply. In the High Street market, several projects are being promoted, including the Canalejas scheme (to be completed in 2019) and the Edificio de España scheme, but in the short term no additional floor space will be added to the stock.

RENT TRENDS

Despite a slow start to the year, investment in Madrid was robust in 2016, although the record level of 2015 was not reached. The current levels of economic and rent growth have raised the attractiveness of the Madrid real estate investment market. However, the limited available product, especially in the prime end of the market, may constrain investment levels in 2017.

Yield levels for prime retail properties have been at historically low levels since 2015 as strong demand continues from private investors and investment funds, especially for big-ticket high street assets. The Madrid office market is suffering from a dearth of product, hardening prime yields over the course of 2016 by 25 basis points to 4%, below the all-time low recorded at the peak of the last economic cycle. With further rent growth anticipated for prime assets in the CBD and ongoing interest from institutional investors, there is still scope for further yield compression.

Q4 20

05

Q4 20

06

Q4 20

07

Q4 20

08

Q4 20

09

Q4 20

10

Q4 20

11

Q4 20

12

Q4 20

13

Q4 20

14

Q4 20

15

Q4 20

16

80

90

100

110

120

130

160

150

140

75

70

80

85

90

95

100

110

105



115

In the office sector, prime rents in the CBD have increased by 12% over the past two years. In peripheral areas, a lack of good quality space is also pressing rents upwards. CBRE Research expects rent levels to continue rising in the coming months, although it is likely that poorer-quality serviced buildings will not benefit from the rental recovery in the short-to-medium term. Retail activity continues to be strong in prime high street destinations and demand from international and national retailers is expected to stay strong, pushing rents up as in the first half of 2016.


Low yields have encouraged a greater number of assets to be brought to market, especially in the high street sector. There will be many opportunities for buyers this year,

especially as some funds come to an end and start to sell some of their key assets.

ECONOMIC TRENDS

OCCUPIER TRENDS

-9

-6

-3

0

3

6

9

2005 2007 2009 2011 2013 2015 2017

Italy GDP Italy ForecastMilan GDP Milan Forecast

Real GDP Growth (%)


12.0

Q4 2016Q4 2015

12.1Office Vacancy (%)


The Italian economy picked up after several years of slow growth and recorded real GDP growth of 0.9% last year. GDP growth is expected to continue at a rate of 0.9% in 2017 and 1% in 2018. Milan will continue to gain ground, with Oxford Economics forecasting GDP growth of 1.7% on average between 2017 and 2020—above the national trend. The expectation is that with improved labor market conditions, growth will continue in the short term.

Milan continues to be highly attractive for private-sector occupiers and as a gateway city and cultural hub, with a proportionally higher level of national headquarters. Strong demand for top-quality space in the CBD and Porta Nuova is expected this year, with users willing to pay for accessibility and location. Strengthening demand in some semi-peripheral submarkets (such as Maciachini, Bicocca, Centro Leoni and Milanofiori) is also predicted for properties that offer good quality and accessibility at lower costs.



YIELD TRENDS


2

3

4

5

6

7

Q4 20

05

Q4 20

06

Q4 20

07

Q4 20

08

Q4 20

09

Q4 20

10

Q4 20

11

Q4 20

12

Q4 20

13

Q4 20

14

Q4 20

15

Q4 20

16

Retail Yield Office Yield Source: CBRE Research, Q4 2016.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Foreign Domestic

(US$ Millions)



2008 2009 2010 2011 2012 2013 20142007 2015 2016




Development activity in the Milan office market continues to be buoyant with approximately 260,000 sq. m. under construction. Completions of two shopping centers added 130,000 sq. m. of retail space to the market last year. Approximately 170,000 sq. m. of new office space is expected to be completed this year, the majority of which will be refurbishments.

The planning process for construction of the largest European mall developed by Westfield in Milan is proceeding steadily, which should deliver around 170,000 sq. m. of new retail space between 2019 and 2020. It is not expected that this will increase vacancy levels, as a significant amount of this space has been preleased.

RENT TRENDS

Investment volume in Q4 2016 totaled $1.1 billion (€1 billion), the second-highest quarterly volume in the past 10 years. This brought the annual volume to $2.7 billion (€2.6 billion), an 8% drop compared with the previous year. Offices had the highest level of investment in Q4 2016, taking 44% of the total volume. Retail investment also performed well, particularly high street assets, which registered $104 million (€96.2 million) of investment in Q4. Foreign investment activity fell in 2016, representing approximately 61% of total investment volume compared with 74% in 2015. Investor interest is shifting increasingly toward core-plus and value-add products in secondary cities such as Florence, Bologna and Venice, where pricing is attractive and rents offer strong growth. Despite that, investment activity continues to be dynamic in Milan and Rome, both of which have strong deal pipelines in Q1 2017.

Strong competition and scarcity of product have continued to put downward pressure on yields. Prime yields and good secondary net yields for offices edged down to 3.75% and 5.50%, respectively, in Q4 2016. In the High Street sector, prime net yields dropped to 3.25%. Yields are at an all-time low and the spread with the 10-year bond rate has never been so wide, despite the uptick in bond yields in the last quarter of 2016. All sectors today show lower rates than the previous cyclical low-point in 2007 by 85 basis points for offices and 95 basis points for high street.

Q4 20

05

Q4 20

06

Q4 20

07

Q4 20

08

Q4 20

09

Q4 20

10

Q4 20

11

Q4 20

12

Q4 20

13

Q4 20

14

Q4 20

15

Q4 20

16

90

95

100

110

120


130

105

115

125

90

140

240

340

190

290


Milan has nine submarkets, the newest of which is the Porta Nuova Business District with retail rents rivaling those of the Milan CBD. Milan High Street rents have steadily increased in the past 10 years, plateauing during periods of economic difficulty. Over the second half of 2016, retail rents stayed stable having grown rapidly during Q1. In comparison, office rents have been more cyclical and have only just begun to pick up since the last recession. Demand continues to rise in the office sector, which is reflected in stronger take-up figures both in the core and peripheral markets. To respond to demand, there has been an increasing number of CBD asset refurbishments.


Investment in more management-intensive and peripherally located assets is likely to con-tinue due to the tight availability of prime assets in the city center. Willingness to take risk and invest in higher-yield properties, such as in development projects, will increase even

though the number of opportunities available is not expanding in parallel.

ECONOMIC TRENDS

OCCUPIER TRENDS

-7

-4

-1

2

5

8

2005 2007 2009 2011 2013 2015 2017

Germany GDP Germany ForecastMunich GDP Munich Forecast

Real GDP Growth (%)


4.89

Q4 2016Q4 2015

Office Vacancy (%)

4.13


The robust German economy, with steady increases in employment and household incomes, continues to drive demand in Germany’s property markets. GDP growth of 1.9% last year was 0.5% above the 10-year average of 1.4%. GDP growth is expected to slow slightly this year to 1.5%. Munich’s unemployment rate fell to 4.2% last year and its economy continues to be stabilized by a growing diversity of business activities and strong network of large, medium-sized and smaller companies and start-ups.

The Munich office leasing market had a strong year in 2016. Overall annual take-up totaled 789,400 sq. m., thanks to a record-breaking fourth quarter. Much of the leasing acitivity was in the highly priced segment in premium locations, mainly by companies from the consultancy, legal and financial services sectors, although technology and knowledge-in-tensive industries are becoming an increasingly important segment of the market. These industries are also driving change in fit-out to integrate new workplace technologies and aid facilities management and ambient control. The lim-ited office supply in good city locations will mean that leasing in business centers and co-working offices will be increas-ingly popular with companies as an interim solution. As a result of the sustained excess demand in the premium office segment and the moderate level of new supply, expect further tightening in the market.



YIELD TRENDS


3

4

5

6

Q4 20

05

Q4 20

06

Q4 20

07

Q4 20

08

Q4 20

09

Q4 20

10

Q4 20

11

Q4 20

12

Q4 20

13

Q4 20

14

Q4 20

15

Q4 20

16


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

(US$ Millions) Office and Retail Investment Activity

2008 2009 2010 2011 2012 2013 20142007 2015 2016

Foreign Domestic Source: Real Capital Analytics, CBRE Research, Q4 2016.




Office vacancy fell by 15% last year, leaving less than 880,000 sq. m. unoccupied. At 4.1%, the vacancy rate is at its lowest level in 15 years, and in the most sought-after city submarkets is under 2%. Just 156,000 sq. m. of space was completed or refurbished last year, the lowest annual volume in 10 years. Approximately 285,600 sq. m. of space is forecast to be completed in 2017—a significant increase from last year and a third of which is preleased. Expect to see a similar volume of completions in 2018.

RENT TRENDS

The Munich commercial investment market reached new highs in 2016 with a record investment volume of $6.3 billion (€5.8 billion), surpassing 2015 volume by 24% and the five-year average by the same amount. Q4 was espe-cially strong, with 47% of the total annual volume. This included the purchase of the Highlight Towers landmark building in Parkstadt Schwabing for more than $535 million (€500 million), by far the largest transaction in the Munich investment market for the year. Office properties dominated transactions, with an almost 80% share total investment volume. Mainly due to the sale of the Office First properties to Blackstone, the portfolio share of total investment volume increased to just under one-fifth compared with 8% in 2015. Foreign investors accounted for 33% of the total volume in retail and office transac-tions, which was slightly lower than in 2005 but mainly because domestic investment was so strong in 2016.

Continued high demand at a time of limited supply of product put further pressure on prime yields for commercial properties in 2016. Yields for top-class office properties in the prime locations fell by 10 basis points to 3.2% between Q4 2016 and Q4 2015. In city fringe locations, which are gaining favor with investors due to the lack of city-center product, the net initial yield fell to 4.1% last year. Yields for prime retail properties reached a new low of 3.1%. As a result of the strong inflow of foreign capital to the German real estate markets, we expect a moderate continuation of the decline in yields this year, particularly as national investors will refocus on domestic opportunities in view of the current global political uncertainty.

Q4 20

05

Q4 20

06

Q4 20

07

Q4 20

08

Q4 20

09

Q4 20

10

Q4 20

11

Q4 20

12

Q4 20

13

Q4 20

14

Q4 20

15

Q4 20

16

90

95

100

105

110

115


125

120

70

50

90

110

130

150

170

210

190


Due to continued tightening of the city-center market, prime rents have increased by 15% in the past five years to €35.00 per sq. m. per month. The long-term lack of Grade A office space with larger floorplates is particularly acute. Submarkets outside the city center are becoming more attractive for tenants and developers due to the rising rents in central locations. Over the next 18 months, another moderate rise in the order of 2% is expected for prime rents. Prime retail rents have stayed at an all-time high of €400 per sq. m per month but are forecast to rise slightly in the next five years.


Record low yields for prime assets mean that investors need to cast their nets more widely to find properties that offer greater levels of return. However, the purchase of highly val-

ue-add properties in pursuit of high yield is still rare.

ECONOMIC TRENDS

OCCUPIER TRENDS

-6

-3

0

3

6

2005 2007 2009 2011 2013 2015 2017

France GDP France ForecastParis GDP Paris Forecast

Real GDP Growth (%)


6.93

Q4 2016Q4 2015

6.20

Office Vacancy (%)


After growing just 1.1 % in 2016, the French economy is forecast to grow by 1.4 % in 2017 and 1.6 % in 2018. French elections will add some uncertainty to the market this year, and likely will suppress growth in the first half year. Howev-er, solid forecast growth in consumer spending of 1.6% and 1.5% in the next two years, respectively, and rebounding investment volumes will underpin future growth. In this context, a slight increase in employment is expected in the next two years.

Total take-up increased by 7% last year to 2.4m sq. m., which was 4% above the 10-year average. However, there was a high degree of variation between submarkets, with central areas such as Paris Centre West registering higher take-up than the Inner and Outer Rims. The active leasing market and low levels of completions last year led to a progressive decline in the vacancy rate in Ile-de-France to 6.2%, whereas many peripheral markets still have a significant levels of vacancy.



YIELD TRENDSOffice and Retail Yield TrendsYield (%)

2

3

4

5

6

7

Q4 20

05

Q4 20

06

Q4 20

07

Q4 20

08

Q4 20

09

Q4 20

10

Q4 20

11

Q4 20

12

Q4 20

13

Q4 20

14

Q4 20

15

Q4 20

16


0

5,000

10,000

15,000

20,000

30,000

25,000

(US$ Millions) Office and Retail Investment Activity

2008 2009 2010 2011 2012 2013 20142007 2015 2016

Foreign Domestic Source: Real Capital Analytics, CBRE Research, Q4 2016.




The pipeline is slightly higher this year than it was in 2016, with 1.7 million sq. m. expected to complete (including 1.2 million sq. m. in units of more than 5,000 sq. m.). More speculative schemes were launched in 2016 than in 2015, with starts on 34 developments above 5,000 sq. m., compared with 27 in 2015 and 14 in 2014. Central locations were clearly preferred by developers: 19 developments were launched in the city of Paris, three in La Défense and five in the Western Crescent.

RENT TRENDS

Several large transactions closed in Paris in Q4 2016, including the Vendôme Saint Honoré for $1.1 billion (€1 billion). Investment activity was particularly high for portfolios, including those comprising a wide variety of assets. For the past two years, transactions of between €50 million and €200 million have accounted for more than 40% of the annual investment total. Core properties still account for the majority of investment transactions, but core-plus and speculative off-plan sales are becoming increasingly popular. The number of value-add transactions has declined slightly, and there were fewer buildings redeveloped last year compared with 2015.

Due to strong competition for prime assets and cheap financing opportunities, prime yields in Paris fell to new lows of 3.0% for offices and 2.9% for retail last year. In view of the current economic and political uncertainty, many buyers will continue to develop defensive strate-gies, acquiring properties with a view to holding them for an extended time. Prime yields will remain under pres-sure, which will lead to narrower spreads on real estate, although there is still scope for further yield compression.

Retail IndexOffice and Retail Rent Trends

Q4 20

05

Q4 20

06

Q4 20

07

Q4 20

08

Q4 20

09

Q4 20

10

Q4 20

11

Q4 20

12

Q4 20

13

Q4 20

14

Q4 20

15

Q4 20

16

90

95

100

110

115

120

125

135

Office Index

140

130

90

110

130

150

170

190

230

250

210


The steady fall in the vacancy rate in central markets last year put upward pressure on office rental rates after several years of stagnation. In Paris-Centre West, pressure on supply and the vitality of the leasing market have enabled land-lords to increase their headline rents. However, commercial incentives have not fallen in parallel, and on average they accounted for 17.4% of the headline rent for space of more than 1,000 sq. m. in Q4 2016. In Ile-de-France, incentives represented a substantial level of headline rents, averaging 21.5%. A slight downturn in incentives has been observed in the city of Paris as well as in the west of the region. Outside the central locations, headline rents were stable. Retail rents, having grown rapidly since 2012, were flat last year having almost doubled since 2012 as international brands seek space in the most sought-after areas of the city.


METHODOLOGY

GENERALAs there is no universally accepted definition of a “gateway city,” we fully accept that many cities outside our sample could claim the title. In choosing our cities, we have considered size, transport infrastructure, corporate presence, real estate investment flows and several other indicators of importance. Beijing, Boston, Chicago, Frankfurt, Hong Kong, London, Los Angeles, Madrid, Milan, Munich, New York, Paris, San Francisco, Shanghai, Singapore, Sydney, Tokyo, Toronto, Vancouver and Washington, D.C., are the cities we have selected as most relevant to international investors. This report is based on our judgement of which real estate variables are most important from the perspective of an investor seeking a detailed, but not exhaustive, global overview. We have focused on the prime office and prime retail locations in these 20 global gateway cities.

Data used this report were derived from CBRE’s proprietary data and key external databases, and cover the following topics: economic trends; occupier trends; supply trends; rent trends; investment activity and yield trends.

ECONOMIC TRENDSIn general, for country- and city-level economic growth forecasts, we use Oxford Economics. Due to data restrictions, we use Moody’s for GDP forecasts for U.S. and Canadian cities. We think this is a reasonable basis for economic comparison across countries and cities.

OCCUPIER TRENDSOccupier trends are based on take-up activity and vacancy rates. Due to considerable differences in market size, take-up and vacancy figures vary substantially across markets. Take-up in the Americas and EMEA is based on leasing activity minus renewals. In Asia Pacific, net absorption, which represents differences in occupied stock over time, is used to indicate occupier-market conditions. Finally, the vacancy rate is the difference between total stock and occupied stock, measured as a percentage.

SUPPLY TRENDSSupply trends are based on the current and future development pipeline. Due to considerable differences in market size, development pipeline figures can vary substantially across markets. The

development pipeline is based on new office space completions in Q4 2016 in local units (i.e., square feet, square meters or tsubo). Office space under construction is measured as new office space expected to be completed within a two-year window. Each market does have its own set of period and size criteria for reporting office space completions and pipelines. We will underline measurement differences where applicable.

RENT TRENDSPrime rents are stated in local currency and in terms of the prevailing unit of floor-area measurement (i.e., square feet, square meters or tsubo). All Office rents are denoted as Prime/Class A building rents for the best location in a given market. All Retail rents are based on the achievable rent which an international retailer is willing to pay for an up-to 200 square meter gross retail unit in the best location of a given market (according to CBRE’s Global Prime Retail Rent publication). Our prime rents are never based on individual units, but usually represent a relatively small area of town that, over the long term, always seem to command the highest rent. They should not be considered the market average rental value. For global comparison we incorporate an ITZA conversion for London and Paris retail. For convenience, a conversion to USD is provided at current market rates as of end Q4 2016. Therefore, we use the following conversion equivalents for U.S. $1: 6.944 RMB, 116.65 JPY, 1.381 AUS, 1.445 SGD, 7.754 HKD, 1.341 CAN, 0.809 GBP, and 0.948 EURO.

INVESTMENT ACTIVITY

Reported investment activity is based on data from CBRE and Real Capital Analytics. From time to time, global definitions of relevant market area, and transaction types constructed for the purpose of international comparison, may differ from local definitions compiled to give a more granular analysis.

YIELD TRENDSOutside the Americas, yield information is based on local CBRE estimates of the income return an investor would receive when acquiring a Class A building in a prime location, fully let at current market rental values. Econometric Advisors’ investment fundamentals database is the source of yield data for the Americas. The terms “yield” and “capitalization rates” are interchangeable in this report. All data as of Q4 2016.

34 EUROPE

Disclaimer: Information in this report, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty, or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.

ABOUT THIS REPORT

Dennis Schoenmaker, Ph.D.Economist, Global+44 20 7182 [email protected]

CBRE RESEARCH LEADERSHIP

Nick Axford, Ph.D.Head of Research, Global+44 20 7182 [email protected]

Richard Barkham, Ph.D.Chief Economist, Global+44 20 7182 [email protected]

Henry Chin, Ph.D.Head of Research, Asia Pacific+852 2820 [email protected]: @HenryChinPhD

Spencer G. LevyHead of Research, Americas+1 617 912 [email protected]: @SpencerGLevy

Jos TrompHead of Research, EMEA+31 20 589 07 [email protected]

CBRE CAPITAL MARKETS LEADERSHIP

Christopher LudemanGlobal President, Capital Markets+1 212 984 [email protected]

Brian StoffersGlobal President, Debt & Structured Finance+1 713 787 [email protected]

Brian McAuliffePresident, Institutional Properties, Americas+1 312 935 [email protected]

Jonathan HullManaging Director, Investment Properties, EMEA+44 20 7182 [email protected]

Tom MoffatExecutive Director, Institutional Properties, Asia Pacific+81 [email protected]

To view Global Gateway Cities for other regions, please go to: www.cbre.com/globalgatewaycities.

To learn more about CBRE Research, or to access additional research reports, please visit the Global Research Gateway at www.cbre.com/researchgateway.

CONTACTS

Documents

CBRE REERC GLOBAL GATEWAY