Positive signs for the Paris office market

Although take-up remained well below its long-term average, the upturn in activity seen in the large transactions category, as well as letting transactions currently being finalised show that offices continue to play a decisive role in the organisation of companies. Their importance even appears to have been enhanced in the minds of both decision-makers and employees, as the particularly trying alternate periods of loosening and tightening restrictions have shown the limits of too much remote working and the need for offices that encourage human contact. In the investment market, the results for the beginning of the year are even more positive.

The second best q1 ever seen

Since the end of the first lockdown, investment volumes in the Greater Paris Region office market had been rising steadily, from €2.2 billion in Q2 2020 to €3.5 billion in Q3, and then to €5.6 billion in Q4. The beginning of 2021 has put an end to this increase in activity, with €3.2 billion invested in Paris and its region in Q1 2021. This significant drop was expected. On the one hand, because the 1st quarter of 2020 had been exceptional (€4.1 billion invested) and, on the other hand, because the lack of visibility and repricing that was deemed too high had, in recent months, led some sellers to withdraw their properties from the market or to postpone marketing, mechanically limiting the stock of transactions waiting to be completed.

Up 45% compared to the ten year average, and well above levels seen during the 2008-2009 financial crisis (270 million invested in Q1 2009), the volumes invested over the last three months are nevertheless substantial. It is even the second best performance ever seen for a 1st quarter, after the record reached at the beginning of 2020. Despite the lack of visibility with regard to the health and economic situation, and a rental market shaken by the restrictive measures, offices are still favoured by investors.

The appetite for larger assets remains particularly strong. Partly driven by sales by real estate companies and insurers (URW, Allianz, AG2R La Mondiale, SFL, Covivio, etc.), investment activity benefited from the completion of a large number of large transactions, with 12 deals in excess of 100 million euros signed in Q1 2021. This is slightly less than in Q1 2020 (14), but much more than the average of the last ten years (7).

Paris, a safe investment

Inner Paris remains the largest market, even though its share has decreased year-on-year (40% of the volume invested in offices in the Greater Paris Region in Q1 2021 compared to 51% at the same time in 2020). This drop is due to the limited number of large transactions and property for sale, and not to a decrease in demand from investors.

In light of the current lack of visibility, Paris still has undeniable advantages: occupier profiles are very varied and some are more resistant to the health crisis, and pre-letting rates are high (46% for projects to be delivered by the end of 2023). The capital's finest assets are also fully benefiting from their status as a safe haven, with investors increasingly selective in targeting the most established geographical sectors and properties offering stable and secure income. Since the outbreak of the pandemic, this context has maintained downward pressure on prime yields and explains the high level of market values, which have reached €18,000/sq m on average in Paris since the end of Q1 2020, compared with  €14,000/sq m in 2019.

Although core properties accounted for two-thirds of office investment volumes in Q1 2021, the price correction in other types of property, the strong fundamentals of the Greater Paris Region market and the search for yields are encouraging several players to take more risks. Despite the tightening of financing conditions, which may prevent or delay the completion of value-added transactions, several value-creating transactions have been recorded, aimed in particular at adapting offices to new occupier expectations (well-being, hybrid working methods, etc.) and to new environmental efficiency standards.

A few assets have also been sold with a view to converting them into housing. Although such operations remain fairly rare, they are nevertheless more frequent, particularly in Paris and the west of the region where there is a large dated and sometimes obsolete stock. Although certain obstacles may still hinder conversions, they should nevertheless continue to increase due to the growing enthusiasm of investors for residential property and a more favourable regulatory and market context.

What is the outlook for the coming months?

The government's decision to tighten restrictions to contain the surge in infections, announced on the 31st March, is again putting the French economy to the test and could delay the recovery of the investment market. However, there are several reasons for optimism, starting with the increase in vaccination campaigns, which are beginning to bear fruit in some countries and which, in France, should lead to a lasting improvement in the health situation from the summer onwards.

The results of the investment market in Q1 2021 also give cause for hope. Contrary to the downbeat rhetoric, the last few months have demonstrated the appeal of the Greater Paris Region and the central role of offices, even if secondary properties and markets are obviously penalised by the lack of visibility on the solvency of companies and the sustainability of rental income. In the coming months, caution will therefore be the order of the day, but office property will continue to feature prominently in investors' allocation strategies given the still very advantageous spread and abundant liquidity.