Paris property market faces major challenges from new planning laws

After two years of consultation, the capital's new strategic plan was adopted by the Paris City Council on 5 June 2023.

A major document - since it defines the main guidelines for urban development in Paris over the next fifteen to twenty years - this new “PLU bioclimatique”  (PLU) makes adapting the City to climate change a major issue, reinforcing the measures adopted during the last revision in 2016.

On the other hand, there is a notable break whereby construction will become an exception and conversion/rehabilitation the new norm.

The scope of the provisions aimed at increasing the supply of affordable housing has also been broadened, along with a stated desire to reduce the amount of office space in the Capital.

In this new research note, we examine the possible consequences of the “PLU bioclimatique” for the Paris property market. This analysis is subject to change, as the content of the project may well fluctuate between now and its final approval, expected by the end of 2024 or the beginning of 2025.

A reduction in office space

"The “PLU bioclimatique” highlights the municipality's desire to reduce the amount of office space in Paris. To achieve this, a new provision will be implemented, which is an obligation to provide a mix of uses (“servitude de mixite fonctionnelle”)" explains Vincent Bollaert, CEO of Knight Frank France.

In the specific zones targeted for residential development, large commercial buildings will be required to include a minimum proportion of residential space when they are either sold, converted or undergo major redevelopment.

To meet its targets for the creation of affordable housing, the City also intends to implicate existing stock by identifying close to 1,000 properties (a process known as “pastillage”), that will create an obligation on these reserved sites to include a proportion of residential space, within which there will be a varying percentage of affordable housing.

"Of the thousand or so sites reserved for residential in Paris, over 600 have been added to those in the previous PLU. These include existing residential property, hotels, car parks and garages, shops and private schools. However, a large proportion of these are office buildings, particularly in the west of Paris. Of the 249 reserved sites identified in the CBD, 85% relate to offices or mixed-use assets with a tertiary focus. In more residential areas, such as the 18th, 19th and 20th arrondissements, offices or predominantly tertiary assets account for just 11% of the 150 or so sites reserved for residential," explains David Bourla, Head of Research at Knight Frank France.

Until now, the vast majority of office to residential conversions in Paris were carried out on public property. When the PLU was revised in 2016, the City had already increased the share of institutional owners in the total number of reserved buildings.

The new “PLU bioclimatique” targets them even more widely, particularly in the west of the City where half of the capital's existing office stock is concentrated. "In addition to a few private individuals, public owners and religious institutions, the owners of reserved sites are most often French institutional investors such as mutual insurance companies, insurers and pension funds, SCPI/OPCIs and foreign funds, notably German.

Some of these investors have been disproportionally impacted, with as many as 10 or more buildings affected. Some of the most expensive streets and districts, such as avenue Kléber, avenue d’Iéna, avenue Hoche, rue de la Paix and certain streets in the Golden Triangle were also targeted. The potential impact on the value of some portfolios is therefore considerable, given CBD office prices, which in 2022 averaged almost €22,000/m²" continues David Bourla.

Increasing shortage of office supply

While the municipality wishes to reduce the footprint of the office sector in Paris, stock has changed very little in recent years. "It is true that the size of the office stock in Paris increased by 10% on average between 2000 and 2023, but this was mainly due to developments in the major development zones, notably “ZAC Nord-Est” and “ZAC Rive Gauche”, explaining the 33% and 37% increase in the stock in the Paris 12/13 and Paris 18/19/20 submarkets. On the other hand, office space has remained stable in the CBD, and has even fallen slightly in certain arrondissements in the very centre of the capital" notes David Bourla.

Occupier demand for office space in Paris has increased, mainly in the CBD, where the market has benefited from dynamic sectors such as luxury, legal, finance and coworking, and from the increased search for centrality since the outbreak of the health crisis.

This context explains the current shortage of office space in the Capital, with the exception of the North-East of the city, where the vacancy rate is close to 10%. On average, the vacancy rate is 3.7% in the Capital, less than 3% in the CBD, and virtually zero in certain submarkets (1.7% in Paris 5/6/7th arrondissements). This means that the Paris commercial property market is clearly undersupplied. While the average vacancy rate for the Paris region is almost 8%, the gap is even greater for some of the world's major cities, such as London, where the vacancy rate is close to 10%, or Manhattan, where it is close to 20%.

Furnished apartments rented via online platforms

In recent years, the Paris market has been shaken up by the development of new online platforms, for example in the short-term rental sector, which have developed exponentially and encouraged the conversion of various types of property into furnished tourist accommodation.

While the conversion of ground-floor retail has already been regulated, the trend has continued in recent years with the conversion of office space.

In Paris however, the phenomenon is limited, since it concerns modest-sized offices (less than 500 sq. m), mainly located in the very center of town. With the new PLU, the City is aiming to severely limit the development of new furnished tourist accommodation. This use will be reclassified under the "other tourist accommodation" sub-destination, and substantial areas will be zoned to prohibit the creation of such.

Lastly, dark stores and dark kitchens will be banned on sites where residential exists, and it will not be possible to convert ground floor premises. Yet the importance of express delivery in the media and political arena is out of all proportion to its real impact on consumer spending and the property market. "Dark stores are a marginal phenomenon which, after a rapid boom, are steadily losing momentum. We identified fewer than 20 dark stores opening in Paris in 2022, after around 60 in 2021. By 2023, the flow of openings will have virtually dried up, and the existing stock may even shrink, given the difficulties encountered by some quick commerce companies such as GETIR and FLINK, which were recently placed in receivership," anticipates David Bourla.

Impact on the investment market

Traditionally prized for its stability, Paris is seeing its status as a safe haven market undermined by the uncertainty surrounding the new PLU and the provisions relating to offices in particular. This is taking place against a backdrop where activity has already slowed sharply as a result of rising interest rates.

In Q1 2023, just under €850 million were invested in the inner Paris office market, compared with an average of €1.5 billion in Q1 between 2020 and 2022. In addition, a number of “reserved site” properties that have recently been put on the market are suffering potentially significant discounts, which is automatically slowing down or even suspending certain sales transactions.

"At a time when the environmental quality of assets is an increasingly important investment criteria, the Paris market could also be penalised by the slowdown in the greening of office buildings. The constraints imposed in the undertaking of major works may encourage owners to make do with minor works, despite the fact that these may not command top level rents, nor top level environmental credentials" points out Vincent Bollaert.

Conversely, recently redeveloped buildings that are not subject to the obligation to provide a mix of uses (“servitude de mixite fonctionnelle”) could see their value increase.

In fact, the slowdown in the launch of redevelopment projects and the reduction in the stock of office space sought by the municipality in the Capital's most sought-after sectors could further limit supply and accentuate the rise in rental values. As a result, a greater number of occupiers will struggle to find office accommodation in Paris, potentially leading some of them to move in more affordable suburban areas.

The future of Paris property market

"The impact of the “PLU bioclimatique” is not just virtual. The provisions contained in the new text have already had the effect of increasing the wait-and-see attitude of investors. In addition, a number of questions remain, which the adoption of the PLU by the Paris City Council has not managed to answer.

These include issues surrounding the impact on the dynamism and diversity of the City’s economic fabric, and the potential of long-term loss of appeal for the Paris property market", says Vincent Bollaert.

Certain questions also concern the retail sector. For example, could more drastic restrictions on changes of use on ground floor premises increase the number of empty shops? This at a time when retailers are looking to downsize their footprints, and with many already experiencing increasing difficulties. "

"More generally, the revision of the Parisian PLU is emblematic of the many challenges facing major cities and highlights the difficulty of reconciling public and private interests, local and international dimensions, and economic and ecological issues" concludes Vincent Bollaert.