In this webinar, David Hourihan, MSc RE Programme Leader at UCEM and Sinéad Murphy,Senior Valuer, Knight Frank Valuation and Advisory present: An Introduction To The Paris Commercial Office Market.

The French Office Investment Market Size

In terms of investment, the French real estate investment market is the third-largest in Europe after Germany and the UK. However, a Savills report (May, 2021) highlights that transactional volumes dropped significantly (37%) year-on-year. In particular, activity in the large transaction category (>€500 m) has decreased considerably. Understandably, the recent lockdown has brought a trail-off of activity. Nonetheless, Q1 turnover was at €4.6 billion, which is higher than the 10-year average.

David explains that prime office yields at 2.75% have remained stable, in a clear sign of a flight to quality in the marketplace. In addition, David argues that there is much outside interest in the French market, mainly focused on Paris. Moreover, the activity is focused on quality, secondary properties.

In terms of individual transactions, it is primarily the small transaction segment (< €50m) that is driving the market. Institutional investors mostly dominate this small transaction segment. David explains that an increase in smaller ticket transactions is a sign of heightened market uncertainty.

David explains that the primary focus in France is centred around the Paris Centre West, which accounts for 19% of investment volume, followed by Western Crescent. European investors, particularly German investors, dominate the French market, followed by US investors.

French Office Investment Market Structure

Regarding structure, Sinéad explains that French investors have become more prominent in the home market. But, as David explains, this is perhaps a sign of caution. Paris remains a key market to France. For example, data indicates that 72% of all transactions in the French market were attributable to Paris.

When looking at investment turnover, whilst transaction levels align with the 10-year average, they have eased off in the last two years. In 2019, transaction levels were at the highest they had been since prior to the 2008 global financial crisis. David contends that this could be attributed to the reaction towards Brexit. However, Sinéad clarifies that 2019 coincided with a period when yields were nearing their highest.

Paris is made up of various types of districts organized in a snail shape. Major districts include La Défense, Paris CBD, Western Crescent, and the inner and outer suburbs. La Défense is the primary business district. In terms of population, there are roughly 2.16 million within the inner Paris region.

Paris Office Investment Market

Beginning with the office occupier market, David explains agents have reported a modest upturn inactivity, with no strong rebound expected. Vacancy rates are holding at 6.4%, and the small unit segment (<1000 sqm) has been the most resilient. Nonetheless, large occupiers (5-10,000 sqm) are slowly returning to the leasing market. While prime rents are holding, rents in secondary locations are decreasing. Moreover, take-up in Q1 was down 30% year-on-year and down 39% against the 10-year average.

The typical office lease terms in Paris include a minimum 3-year term for a commercial office lease. All leases are subject to rental indexation on the lease anniversary, both upwards and downwards. Tenant break options run in 3-year increments at years 3,6, and 9. In Paris, the tenant retains the right to renew the lease at the end of the contractual term. In addition, insurance, building tax, and service charges are covered by the landlord and recovered from the tenant. Furthermore, depending on the financial standing of the tenant, rental deposits may be requested.

To conclude this segment, David ran through a SWOT analysis of the Paris office market. Beginning with strengths, France is ranked 4th out of 99 countries in JLL’s Global Real Estate Transparency Index. Moreover, there is stable rental growth in France’s top five markets of Paris, Lyon, Toulouse, Marseilles, and Lille.

Regarding weaknesses, there have been increased foreign ownership restriction laws implemented from April 2020. Additionally, GDP growth in France has lagged, compounded by the current global economic recession. The threats present include the unknown long-term impact of COVID-19, social tensions in France, and regional tensions among EU member states. Nonetheless, there are opportunities, specifically, the influx of office occupiers into Frankfurt post-Brexit and the government infrastructure projects, such as the Grand Paris Express.

Paris Office Investment Market —Key trends and forecasts

Looking ahead, Sinéad explains that the market for office space demand is likely to remain subdued. Sinéad believes there will be more demand for offices that incorporate wellness and team-building amenities to facilitate staff exchange.

In addition, commuting trends have changed. As Sinéad describes, people are hesitant to take the metro and clustered public transport, given the current situation. Instead, when travelling people prefer to walk and cycle to work. In addition, Sinéad believes that an essential aspect of enticing people back into the office is providing high-quality offices in a central location. David describes this as the ‘hotelification’ of the office space. Specifically, tenants want to occupy the most sustainable and environmentally favourable buildings. Moreover, tenants are increasingly demanding conference and meeting management services, gym and fitness spaces, and other wellness amenities.

Finally, Sinéad discussed the office investment life cycle. While it is difficult to accurately assess, Sinéad believes that the Paris office market is currently between the recession and recovery phase.