Robert G. WATERLANDFRICS

Managing Director Société de la Tour Eiffel

The Paris Office Market in a nutshell

La Sorbonne Paris IVInstitut d’urbanisme et d’aménagement

19th October 2011

London and Paris dominate European office markets

Ile de France: largest market in Continental Europe and Eurozone• Paris : 52 million m²• Madrid : 14.5 million m²• Frankfurt : 12 million m²• Rhône Alpes : 20 million m²• French regions : ± 100 million m²

2

Office development since 1981Development starts

3Source : ORIE

19811982

19831984

19851986

19871988

19891990

19911992

19931994

19951996

19971998

19992000

20012002

20032004

20052006

20072008

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

2009

2010

A history of cycles (highs )The commercial office market developed as a result of the emergence of the service economy from the mid 1960s. Previously offices were owned and occupied principally by state organisations (ministries, post, police) or were ancillary to industrial plantsAverage : 1.2 milion m² deliveries per year but 3 boom periods• 1968-72 : the “Manhattanisation” of Paris (La

Défense, Maine Montparnasse, Beaugrenelle)• 1986-91 : Boom in anticipation of financial

deregulation (big bang), European integration (1992) and lifting of developers agrément requirement

• 1997-01 : Economic recovery. Internet bubble4

A history of cycles (lows )

Intervening busts !• Late 1970s : successive oil crisis• Early 1980s : Mitterrand !• Early 1990s : Economic recession in the

wake of Gulf War• Early 2000s : Burst of internet bubble• 2007 : Subprime – Lehman Brothers

5

Emergence of established office development sectors

First stand alone offices were buildings converted from other uses, mostly residential Development market grew from golden triangle to 1. Main line station hubs : Montparnasse, Gare de Lyon,

Gare d’Austerlitz, Gare Saint Lazare2. La Défense (inaugurated 1958)3. Golden crescent – brown field sites following

disindustrialization4. Other inner suburbs on public transport routes (Saint

Denis, Montreuil)5. Outer suburbs and new townsWestern sectors however have constantly held a dominant position 6

Planning and licensing• The administration strove to channel development by a

number of tools and the authority of the DATAR* – developer’s “agrément”, – occupier’s “agrément”, – “redevance bureaux”, – annual office tax

to counter concentrations and an imbalance in offices between East and West

• It also set an example : Banque de France, Marne la Vallée - Ariane Espace, Evry - Ministry of finance, Bercy – Caisse des dépôts, Paris Rive Gauche

• Over the years, these artifices have been relaxed with no real detrimental effect on geographical market balance

• Developer’s “agrément” however remains a decisive tool in the regulation of office development in the Region and the quest for parity with residential 7* Délégation interministérielle à l’aménagement du territoire et à l’attractivité régionale

The occupational marketMain office sectors as defined by Immostat

Source Immostat / Jones Lang Lasalle

8

Paris Centre West

Southern Paris

North-Eastern Paris

La Défense

Western Crescent

Inner Rim

Annual global take up

Gross take up (million m²)France GNP (%)Global growth (%)

Expected end 2011: + 2 million m²

Source CB Richard Ellis / Immostat / INSEE / FMI

9

Madrid :500,000 m²Frankfurt

450,000 m²Brussels

400,000 m²Lyon

200,000 m²

Paris office market performance is generally correlated to global economics

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 110

0.5

1

1.5

2

2.5

3

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

Gross take up (million m²)France GNP (%)Global growth (%)

Expected end 2010: + 2.2 million m²

Annual vacancy ratelowest in Europe

Source CB Richard Ellis

10

ComparableaverageMadrid :

13.0%Frankfurt

15.0%Moscow

17.5%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Q2 2011

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

2.50%

4.00%3.40%

5.80%

5.10%

6.00%

8.30%

5.60%

3.70%

6.20%

6.60%

2.50%

6.20%

5.50% 5.20%

6.60% 6.70%

Paris La Défense Ile-de-France

Wide spectrum of demandTypical breakdown of take-up by user activity

(> 1,000 m² )

Source CB Richard Ellis

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Industrial sector 17%

Other4%

Transport - Logistics - Distribution

12%

Public sector11%

Real estate services5%

Banking - Insurance23%

Legal - Consultancy8%

Communication - Creation

7%

Information technology and communication 13%

Typical annual demand profile of > 5 000 m² by sector

Source BNP Paribas Real Estate

12

Demand Supply

Domination of the West

North inner rim

Paris ex CBD

Paris CBD

Western crescent East inner rim

South inner rim

Annual rental progressionNet average rent for prime and/or new space > 1 000 m²

Source CB Richard Ellis 13

Average rent Prime Paris CBD Average rent Prime Western Crescent

Average rent Prime La Défense Average rent new, refurbished, renovated Ile-de-France

Current letting market

• Market weakness due to global economic environment rather than intrinsic supply and demand equation

• Positive GDP growth superior to 2% pa required to absorb unemployment in the service sector and increase office demand

• Despite respectable level of transactions, 2 million m² per year, negligible net absorption of stock

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Consequently

• Immediate supply : 3.65 milions de m² / 7.0 % vacancy rate

• Downward pressure on rents• Substantial landlord concessions on leasing• Dichotomy : prime/secondary

new/second hand• Should be noted that of 52 million m² overall stock

probably 35% occupied by administrations that is never transacted (viz. vacancy rate)

• Tenants have been able to renegotiate passing rents which has helped limit vacancies

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However new supply pipeline is drying up

Source BNP Paribas Real Estate

16

French office development pipeline

Speculative

Pre-leased

millions €

943

254

0

500

1 000

1 500

2 000

2 500

3 000

3 500

4 000

4 500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 S1

584

2 004

Future projects dependent on feasibility and finance

Source Jones Lang Lasalle17

In m²

3T2011 2012 2013 20140

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

121,861 345,884 29,400

103,495

256,274

173,175

65,050

85,749

1,525,065

459,786

Potential deliveriesBuildings under constructionPreleased area

Current rental values

Source CB Richard Ellis / Immostat

Weighted average rents as at 1st July 2011

Trend compared to 1st July 2010

Comparable prime rents

London € 1 120Madrid € 320Frankfurt € 400

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New / renovated Second handParis Centre West € 535 é € 404 éSouthern Paris € 442 é € 340 éNorth Eastern Paris € 309 é € 251 éLa Défense € 480 é € 355 =Western Crescent € 314 ê € 226 êInner Rims € 241 ê € 163 éOuter rim € 164 ê € 110 êAverage Ile-de-France € 306 = € 224 ê

Typical residential rents

Paris Intra muros 300-350 €/m²Western suburb 200-250 €/m²

Pyramid of rental transactions

17%

37%

29%

14%

3%

> 600 € 450 - 600 €

300 - 450 € 150 - 300 €

< 150 €

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Every picture tells a story

Variable sector outlook

• Traditional Paris intra muros market: stable, reduced rents (-30%) rekindle demand

• La Défense : large space takers; highly cyclical both in terms of supply and demand – under pressure!

• Emerging markets : Saint Denis, Boulogne, Montreuil, Issy-les-Moulineaux : weak demand relative to supply, market equilibrium varies

• No real overall change anticipated before 2013, despite low supply inventory. Improvement largely dependent on gradual employment recovery

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Current occupational trends• HQE / green – 11% of available supply• Large enquiries invariably motivated by regrouping (60%) and

rationalisation. Centrifugal forces spinning tenants out of the CBD and la Défense:– Lower operating costs– Higher occupational density– Energy efficiency– Move towards horizontal, campus style, space often preferred by new

generation management

But public transport a prerequisite• CBD small lettings dominate• Second hand space partially recovering thanks to rental adjustment• Rental renegotiation on existing leases largely over but could reappear• 93% of enquiries are for leasing as opposed to acquisition• For larger transactions, negotiation periods trending outwards (450

days average)21

Future occupational trends

• Flat market dominated by tenant rotation with limited future growth until 2013/14

• Cost cutting and rationalisation will continue to be key drivers for demand

• New developments to remain targeted by tenants leading to shortage in some areas

• Gradual reduction of landlord concessions – balanced market in terms of supply and demand

• Horizontal versus high rise!22

Not forgetting Grand Paris

ProjectFast undergroundTram-trainTramUndergroundExpress road

Presidential projectEconomic or urban pole

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Grand Paris

• Ambitious project to create international metropole capable of rivaling New York, London Shanghai and Tokyo – Presidential initiative

• Creation of economic poles around Paris with comprehensive interconnecting transport links

• Timing 2009-2025• Finance ? : €30-35 billion• Political ramifications – opposition parties against• Little if any discernable influence on market as yet,

except for indirect tax hikes. Sustainability a far more relevant issue.

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The investment market

• Largest city market in Eurozone• Created by the British investors and their

advisors in the 1970s• Over the years structural changes have helped to

develop and improve the market– Registration duties reduced from 20% to 5% late 1990s– Longer leases– SIIC regime (2004 – equivalent REIT)– Deregulation of occupational market (agrément)– Increased professionalism:

• Chartered surveyors• Due diligence• Advisory• Benchmarking

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The investment market

26

Investment in French offices since 1992

Sour

ce K

eops

Speculative bubble spurred by leverage

In €bn

estim

ated

Investment market trends

• Severe impact of world financial crisis, notably lack of liquidity

• Value adjustment more rapid than previous crisis• Following falls, values now stable• Low volumes centred on core properties (risk

aversion)• Lack of financing limits lot sizes (Bâle III

exacerbates)• Limited evidence of distressed sales• Anticipated orderly work out of defaulters by banks

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1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Q12011

0%

2%

4%

6%

8%

10%

12%

Prime office yield Paris CBD

OAT TEC 10 (half-year average)

Euribor 3 months (monthly average)

Yield pattern

28Source CB Richard Ellis

4.75%

3.69%

1.18%

Typical office yields

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Prime offices 4.65-6.00 %La Défense 5.75-6.75 %Western Crescent 5.25-8.75 %Outer suburbs 6.75-12.00 %Regions 6-8 %France retail 4.5-9.0 %Prime Logistics 7.15-8.00 %

Investors

Large panel of players both national and international:• Insurance companies• SIICs• Private funds / family offices• OCPIs• Pension funds• International (German, UK, US, Spain, Italy, Korea,

Middle East, etc…)• Currently French insurance companies and

international family offices dominate the market driven by identifiable yield and long term capital growth considerations

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Developers

31

•Bouygues•Nexity• Icade•Vinci•HRO

•Cogedim

Agents and advisors

32

• BNP Paribas Real Estate (nb DTZ)

• Savills

• Keops (nb UFG-Colliers)

• CBRE• Cushman & Wakefield

• Jones Lang Lasalle (nb King Sturge)

Concentration is the order of the day

Associations• European Real Estate Association• Fédération des Sociétés Immobilières et

Foncières• Institut de l’Epargne Immobilière et Foncière• Royal Institute of Chartered Surveyors• European Goup of Valuers’ Association TEGOVA

• IPD

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