The office market in the Greater Paris Region – 4th quarter 2013

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Information about The office market in the Greater Paris Region – 4th quarter 2013
News & Politics

Published on February 17, 2014

Author: JLLFrance



Office rentals dropped in 2013 as a result of low growth and uncertain outlook (down 25% in 12 months).
Rise in immediate supply to 3.9 million sqm. Nevertheless, Grade A properties still only account for less than 20% of vacant stock.
In this context, rents remain under pressure. Most of the decline in values in Paris CBD has been recorded in 2013.
With €11 billion invested in 2013, the investment market maintains its trend for dynamic growth.
30 transactions over €100 million recorded in 2013.
The prime yield for the Central Business District fell to between 4.25 and 4.50%.

The office market in the Greater Paris Region – 4th quarter 2013 Contrasting performance of the leasing and investment markets Office rentals dropped in 2013 as a result of low growth and uncertain outlook (down 25% in 12 months). Rise in immediate supply to 3.9 million sqm. Nevertheless, Grade A properties still only account for less than 20% of vacant stock. In this context, rents remain under pressure. Most of the decline in values in Paris CBD has been recorded in 2013. With €11 billion invested in 2013, the investment market maintains its trend for dynamic growth. 30 transactions over €100 million recorded in 2013. . The prime yield for the Central Business District fell to between 4.25 and 4.50%.

On Point • The office market in the Greater Paris Region – Q4 2013 Page 2 Office rentals: a struggling market As we indicated several months ago, the sharp drop in large transactions, in particular major turnkey projects, has affected the figures for 2013 since the shortfall we are experiencing accounts for more than half a million square metres, down 45% compared to 2012. ImmoStat has just published its figures for 2013 and it is no surprise that the slowdown experienced at the start of the year is still ongoing. Take-up in the Greater Paris Region ultimately reached 1.845 sq m, down 25% since 2012. This is the slowest rate of growth seen in a decade. Nevertheless, the downturn in activity was not as bad by the end of Ratio of turnkey transactions in the total take-up (yoy change) In million sq m 2,5 Turnkeys 2,464,000 Excl. turnkeys 24% 2,0 1,844,000 11% 1,5 1,0 0,5 0,0 2012 2013 Source: Jones Lang LaSalle the year as during the first three quarters of 2013. In fact, for the first time in twelve months, quarterly take-up broke the 500,000 sq m barrier Q4 alone. Macro-economic data as at Q4 2013 (yoy change) 2013 The decline in activity of the large segment (>5,000 m²) was notable, Yoy change recording a 45% drop in 2013. Finally, 53 deals for properties over GDP (3rd quarter) -0.10%  5,000 sq m were completed, representing approximately 655,000 sq Salaried employment (3rd quarter) -10,734 -0.3%  m compared to 73 transactions in 2012 for 1.2 million sq m. It is primarily major turnkey operations that are missing from the Business climate (Dec.) 94  Source: INSEE picture this year, since they account for only 11% of take-up despite having represented nearly a quarter of volumes rented in 2012. This high level of activity had largely contributed to the good rental performance in 2011 and 2012. Greater Paris Region KMI’s Q4 2013 (yoy change) 2013 Office rentals dropped in 2013 as a result of low growth and uncertain outlook. The persistent unpredictability of the business environment has prompted a large number of companies to Yoy change Total take-up 1,844,497 sq m  Immediate supply 3,925,000 sq m  7.5%  renegotiate their leases rather than move, thereby avoiding the Immediate vacancy rate costs of relocation and the widespread repercussions on staff that a Prime rent €710 /sq m  move can have. Average 2nd hand rent €312 /sq m  Source: Jones Lang LaSalle/ImmoStat/ORIE

On Point • The office market in the Greater Paris Region – Q4 2013 Page 3 A handful of sectors are doing well this year Number of large transactions > 5,000 sq m (as at 4th quarter of the year) Broken down by region, results vary greatly from sector to another one, with very few markets doing well this year. In central Paris, demand has fallen by 19%. All sectors are experiencing a downturn in the capital, except Paris Centre West (including CBD) which is bucking the trend with a 4% rise in activity since last year. Despite a highly complex economic environment, companies have not remained frozen, since the sector recorded 10 transactions over 5000 sq m (vs. 8 in 2012), the largest being Klesia (~15,000 sq m) in Rézo, and TGI (~30,000 sq m) in the ZAC Clichy-Batignolles, two Source: Jones Lang LaSalle/ImmoStat new buildings under construction. Take-up in the La Défense market was disappointing at 110,000 Take-up change by surface area (12 months change) sqm, a decrease of 34% in 2013. There were only 4 deals for In million sq m properties greater than 5,000 sq m (vs. 7 last year), the largest 3,0 being ERDF in “Tour Blanche” (~22,000 sq m). In Q4, Egencia 2,5 leased 5,600 sq m in “Tour Egée”. 2,0 In the Western Crescent, the rental market performed well on the whole, contrary to the widespread downturn at regional level. First < 5,000 sq m > 5,000 sq m 1,5 1,0 prize goes to Neuilly-Levallois, which saw a 76% increase thanks to 0,5 two major transactions signed at the end of the year in Levallois: 44% 0,0 35% 35% 43% Cetelem (~35,000 sq m) in Q3 and SAP (~28,000 sq m) in “So Ouest” in Q4. Second and third place are held by the Northern Bend and Southern Bend sectors, which also had a good year. L'Oréal Source: Jones Lang LaSalle/ImmoStat took on further office space in Clichy in the “Nuovo” development (~21,500 sq m), whilst in Boulogne and Issy, several companies are being seduced by the number of quality premises, the great accessibility of the area and the attractive rents. Q4 also saw a particularly high number of major transactions: Banque Postale in “Bords de Seine 2”, CocaCola in “Noda”, Boursorama in “You” and Vinci in “In Situ”. In the inner suburbs and southern outer suburbs, rental activity in contrast experienced a sharp decline on account of the large number of major transactions completed in these areas in the previous year. However 2013 was marked by the following arrivals: Eiffage (future campus) in Vélizy, Orange in “Eastview” (Bagnolet), Ericsson in “Hélios” (Massy), HAS in “Green Corner” (Saint-Denis), Dassault (extending their campus) in Vélizy and Lafarge in “Le Panoramic” (Clamart). « So Ouest » - Levallois 44% 44% 45% 48% 48% 48% 37% 36%

On Point • The office market in the Greater Paris Region – Q4 2013 Page 4 Take-up change as at Q4 2013 (split by sub-market) Source: Jones Lang LaSalle/ImmoStat

On Point • The office market in the Greater Paris Region – Q4 2013 Page 5 Available supply shoots up by 9% in one year Grade A ratio in the immediate supply > 5,000 sq m (split by market) The weakening of the rental activity has contributed to the marked Immediate supply > 5,000 sq m increase in available supply. By the end of the year, office supply Grade A ratio had reached unprecedented levels, with 3.925 square metres Outer Suburbs 468,000 sq m 17% immediately available, accounting for 7.5% of the office stock. This Inner Suburbs 272,000 sq m 27% rise was largely driven by vacancies arising in existing buildings, Paris 167,000 sq m 8% whilst there were only limited deliveries of available new buildings in Western Crescent 599,000 sq m 42% Q4. The share of new premises account for only around 20% of the La Défense 373,000 sq m 54% immediate supply, with the proportion of Grade A properties being even smaller. The steepest rises were recorded in west of the Greater Paris region, a market which saw a particularly high number of new Source: Jones Lang LaSalle/ImmoStat Immediate supply and vacancy rate change (by building quality) deliveries this year, with La Défense and the Southern Bend leading Second hand supply New/Refurbished supply Vacancy rate In million sq m the way with ~140,000 sq m and ~60,000 sq m respectively 4,5 delivered vacant in 2013. Vacancy rates are therefore on the up: 4,0 12.2% in La Défense and 14.2% for the Western Crescent. 3,5 In general, supply is more prevalent in the inner suburbs whereas in 2,5 2,0 the capital itself the vacancy rate remains at 5.1%, despite an 1,5 increase. Despite everything, an encouraging sign this year has 1,0 been that certain new buildings, which in some cases have 0,5 remained vacant for several years, are gradually finding tenants now that their rents have been revised. 5% 4% 3% 2% 24% 2008 28% 26% 23% 20% 22% 2009 2010 2011 2012 2013 Source: Jones Lang LaSalle/ImmoStat/ORIE Rents remain under pressure Prime rents in Paris CBD and La Défense have remained stable this Immediate supply as at Q4 2013 (split by market) quarter, at €710/sq m and €530/sq m respectively. Over the past year, however, CBD prime rents have fallen considerably due to the lack of any contracts being signed for exceptional levels of rent. 9% 28% 11% 14% 28% Fewer than 10 deals were signed for over €700, with the maximum being only €750. However, we estimate that most of the decline in headline rents was recorded this year. In La Défense, the most expensive contracts signed were for premises in the “Coeur 10% Défense” office complex. Source: Jones Lang LaSalle/ImmoStat As far as incentives are concerned, after a significant upturn in 2012, the figures were more varied in 2013, albeit remaining high across all sectors. Overall, the market remains well supplied with supply, and companies continue to have the upper hand in negotiations. 7% 6% 3,0 0,0 8% Paris CBD Paris (excl. CBD) Western Crescent La Défense Inner Suburbs Outer Suburbs 1% 0%

On Point • The office market in the Greater Paris Region – Q4 2013 Page 6 Vacancy rate as at Q4 2013 (split by sub-market) Source: Jones Lang LaSalle/ImmoStat/ORIE Prime rent as at Q4 2013 (split by sub-market) Source: Jones Lang LaSalle/ImmoStat/ORIE

On Point • The office market in the Greater Paris Region – Q4 2013 Page 7 Outlook “Looking beyond the figures for 2013 as a whole, the fact that takeup exceeded 500,000 sq m in Q4 bodes very well for the year to come. With large companies sustaining their demand and owners Projects under construction and available up to 2016 (split by market) providing true financial incentives for companies, the barriers are In sq m 300,000 lifting one by one. We therefore expect an upturn of activity on the 250,000 TOTAL Inner Suburbs Western Crescent Paris (excl. CBD) Outer Suburbs La Défense Paris CBD market to around 2 million square metres for 2014, although this remains less than the long-term average”, explains Jacques Bagge, Head of the French leasing team of Jones Lang LaSalle. There is still a considerable volume of supply to rent, especially in the suburbs. Available supply ought to meet and absorb the 200,000 150,000 100,000 50,000 demand, especially in sectors where new available supply is high. 2014 387,000 sq m The arrival of new projects, in La Défense and in the Southern Bend sector in particular, should consolidate or even accentuate the shortfalls currently being experienced. We could therefore see vacancy rates in certain areas rise even further in the coming months. In fact, although speculative office developments remain limited, the majority of these projects, currently under construction (~800,000 sq m in total), are located in the west of the Greater Paris Region (~45%). It is still a tenant's market, and there has been no change in direction among owners who should remain attentive to the operational and financial constraints faced by companies. Prime headline rents should stabilise in 2014, especially in sectors where there is a limited supply of high quality rental premises, such as Paris CBD. As for actual rents, they are likely to remain at the lower end due to the widespread excess in supply and a sluggish leasing market. Lease renegotiations should also remain numerous, the strong lack of confidence does not encourage companies to leave their current premises. Source: Jones Lang LaSalle 2015 406,000 sq m 2016 9,000 sq m 2014 - 2016 802,000 sq m

On Point • The office market in the Greater Paris Region – Q4 2013 Page 8 Sustained activity on the investment market in 2013 A dynamic year in 2013, with 2014 looking set to pass the €12 billion mark in the Greater Paris Region The dynamic growth and stability on the Greater Paris Region investment market surprised everyone this year, despite the « Passy Plaza » - Paris 16th financial climate and the situation on the leasing market . After a dynamic 3rd quarter, this year didn't see the usual 4th quarter Macro-economic data as at Q4 2013 (yoy change) “race to the finish” for the investment market, with “only” €2.9 billion Q4 2013 being invested over the final three months. Yoy change That brought the total investment figure for 2013 to over €11 billion. GDP (3rd quarter) -0.10%  Despite a 9% decline compared to 2012, the market is ECB headline rate 0.5  10-year-bond 2.5  3-months-Euribor-rate 0.287  5-year-SWAP-rate 1.26  demonstrating no less momentum and has not broken its habit of recording levels of activity. An even balance of deals either side of the €100 million mark Source: INSEE / Agence France Trésor / / Jones Lang LaSalle-Thomson Reuters Following the signature of several major deals in the 3rd quarter, the end of the year followed suit with a further nine contracts worth over €100 million each being signed. The biggest transaction, not just for the quarter but also for the year, was the sale by DOCKS Greater Paris Region KMI’s as at Q4 2013 (yoy change) LYONNAIS of the Greater Paris Region elements of its French portfolio to ABU DHABI INVESTMENT AUTHORITY (ADIA) for an estimated €580 million. Another salient deal involved the purchase 2013 Investment volumes Yoy change €11.075 M  by THOR EQUITIES, along with an Israeli investor, of “65-67 Average investment deal €51 M  Avenue des Champs Elysées” from UBS for €280 million. Number of transactions of which over €100m 216 30   4.25 - 4.75  Finally, 2013 saw 30 transactions exceeding the €100 million mark, almost identical to that of 2012, but for a sligthly lower total amount. Prime office yield Source: Jones Lang LaSalle/ImmoStat No market segment under-performed particularly badly compared to 2012. The Greater Paris Region market has therefore once again proven a very evenly-balanced sector with investment volumes divided equally between transactions worth less than €100 million (49% by volume) and those worth over €100 million (51% in total).

On Point • The office market in the Greater Paris Region – Q4 2013 Page 9 Inner suburbs attract nearly half the capital Quarterly investment (in volume) Receiving 43% of the total investment amount, central Paris isn't yet absorbing the majority of the invested amount, although it's not far In €Bn 16 off. The inner Parisian suburbs have done rather well this year, 14 attracting 47% of the capital invested i.e. over €5.2 billion (up 48% in 12 just one year). 10 Not counting the DOCKS LYONNAIS portfolio, the three biggest 4,77 6 suburbs: 12,12 4 11,08 -9% 2,95 8 transactions recorded in 2013 were all within the inner Parisian Q4 Q3 Q2 Q1 - “Eco Campus” in Châtillon, 2008 - and “Adria” tower in La Défense. 2009 2010 2011 2,68 1,44 0 3,69 3,51 2 - “Sequana” tower in Issy-les-Moulineaux (JLL transaction), 2,40 1,76 2012 2013 Source: Jones Lang LaSalle/ImmoStat La Défense therefore ended the year on a high with over €900 million invested (6 transactions), making it the best year for this market since 2007. Underpinning this good performance were three Investment split by individual lot-size as at Q4 2013 (in number of deals) deals over €100 million. Following the sale by IVANHOE CAMBRIDGE of the “Pacific” tower to TISHMAN SPEYER PROPERTIES for €228 million (JLL transaction) and the sale by From €50 to €100 M TESTA to PRIMONIAL of “Adria” tower for €450 million, SAINT- From €100 to €300 M GOBAIN followed up by selling Les Miroirs (Buildings A and B) to From €300 to €500 M PERELLA WEINBERG PARTNERS for €110 million in the 4th > €500 M 0% 12% 1% < €50 M quarter. Source: Jones Lang LaSalle/ImmoStat Office premises remain on top, but a dynamic year for retail Although office assets continue to dominate the sector, accounting for 86% of commitments, retail sales remain dynamic and represent Investment volume as at Q4 2013 (by asset class) 9% of investment in the Greater Paris Region (-5% in a year). This year saw five retail transactions over €100 million. Three of them were only signed in the 4th quarter: the purchase by THOR EQUITIES of “65-67 Avenue des Champs Elysées” (€260 million), the portfolio sold by ALTAREA-COGEDIM to ALLIANZ for €190 million, and the purchase of “Passy Plaza” by GENERALI from EUROCOMMERCIAL transaction). PROPERTIES for €150 million (JLL Source: Jones Lang LaSalle/ImmoStat 18% 69%

On Point • The office market in the Greater Paris Region – Q4 2013 Page 10 A sluggish forward funding market After an already difficult 2012, the forward funding sale market had Forward funding sale ratio in the total office investment Q4 2013 (in volume) In €Bn A return of foreign investors, but French investors still 1,64 1,57 1,92 2,23 1,60 1,61 1,32 0,90 1,10 1,28 1,11 Q3 2013 Q4 2013 be worth an estimated €90 million. 1,05 Q2 2013 0 Q1 2013 2 EIFFAGE headquarters in Vélizy-Villacoublay in a deal believed to Q4 2012 4 transaction), and FONCIERE DES REGIONS purchased the future Q3 2012 6 “In Situ” from VINCI IMMOBILIER/NEXITY for €110 million (JLL Q2 2012 purchase the “Ardeko”* building for €140 million, DeAWM purchased Q1 2012 8 Q4 2011 10 sales were completed in Q4: IVANHOE CAMBRIDGE agreed to Q3 2011 12 Region, down 16% since the previous year. Three forward funding Q2 2011 was invested on forward funding office sales in the Greater Paris Offices's sales (excl. forward funding sales) Offices' forward funding sales 14 Q1 2011 not yet refound its footing by the end of 2013. More than €1.1 billion Source: Jones Lang LaSalle/ImmoStat dominate the market As we predicted, the number of foreign investors increased in the final quarter of the year, driven in particular by major transactions Investment split by nationality as in 2013 (in volume) such as the sale of the DOCKS LYONNAIS portfolio to ADIA. Six of the 9 transactions over €100 million in the 4th quarter were signed by international investors. “The increased foreign activity in the 4th quarter bears witness to the appeal of the Parisian market for international investors. Their relatively low rate of involvement since the start of the year was not a reflection of any lack of interest in the Parisian market place, rather the result of a lack of opportunities suited to their investment strategy” explains Stephan von Barczy, Head of French Capital Markets Group at Jones Lang LaSalle. Source: Jones Lang LaSalle * although initiated in 2011, this transaction was recorded in 2013 because of its specific legal arrangement. Nevertheless, French investors continue to largely dominate the investment market, accounting for 67% of amounts committed in the Greater Paris Region. Historically highly active in the <€100 million Prime yields as at Q4 2013 (split by sub-sector) sector, this year they have also moved into the major transactions segment (“Eco Campus”, “Adria” and even the BOUYGUES Technopole in Meudon-la-Forêt). Fall in yields in the most active sectors Buoyed by a persistently strong demand for the best products and low financing rates, we have seen a slight fall in prime yields for the most well-established sectors in the Greater Paris Region. For Paris CBD, therefore, the reference rate for Greater Paris Region slipped from 4.50-5.00% to 4.25-4.75% in the final quarter of 2013. Source: Jones Lang LaSalle

On Point • The office market in the Greater Paris Region – Q4 2013 Page 11 Outlook Once again, the investment market in the Greater Paris Region Consensus forecasts proved in 2013 that it could exceed the €10 billion mark without any Up to 2014 need for special tax incentives. Trend Y on Y GDP (year end) Based on products currently available on the market, products potentially available for trading during the year and transactions currently being negotiated, total investment has the potential to exceed €12 billion in 2014. In addition, foreign interest in the Parisian market place has not waned and overseas investors are particularly involved in some of the major deals underway: the sale of the RISANAMENTO portfolio and the sale of the “Beaugrenelle” commercial centre. Finally, as regards funding, although banks continue to dominate the market, debt funds have effectively deployed a share of their capital and new insurers have entered the scene. In 2013, competition between lenders triggered a fall in margins for prime asset funding, offsetting the rise in rates. This means that assets with a higher risk investment profile are now able to secure funding.   10-year-bond   3-months-Euribor-rate   Source: Consensus forecasts – December 2013

Jones Lang LaSalle French Offices Paris 40-42 rue La Boétie 75008 Paris Tél. : + 33 (0)1 40 55 15 15 Fax : + 33 (0)1 46 22 28 28 La Défense Building Le Berkeley 19-29, rue du Capitaine Guynemer 92903 Paris La Défense Cedex Tél. : + 33 (0)1 49 00 32 50 Fax : + 33 (0)1 49 00 32 59 Saint-Denis 3, rue Jesse Owens 93210 Saint-Denis Tél. : + 33 (0)1 40 55 15 15 Fax : + 33 (0)1 48 22 52 83 Le Plessis-Robinson “La Boursidière” BP 171 92357 Le Plessis-Robinson Tél. : + 33 (0)1 40 55 15 15 Fax : + 33 (0)1 46 01 06 37 Lyon 55, avenue Foch 69006 Lyon Tél. : + 33 (0)4 78 89 26 26 Fax : + 33 (0)4 78 89 04 76 Contacts Virginie Houzé Director Research Department Paris +33 (0)1 40 55 15 94 Sophie Rozen-Benaïnous Research Manager Research Department Paris +33 (0)1 40 55 85 15 Manuela Moura Consultant Research Department Paris +33 (0)1 40 55 85 73 COPYRIGHT © JONES LANG LASALLE IP, inc. 2014 - No part of this presentation may be reproduced or transmitted in any form or by any means, or stored in any database or retrieval system of any nature, without prior written permission of Jones Lang LaSalle except for any permitted fair dealing in accordance with all applicable copyright laws. Full acknowledgement must be given for any such use. This presentation is based upon materials either compiled by us through independent research or supplied to us by third parties. Whilst we have made every effort to ensure the accuracy and completeness of the data used in the presentation, we cannot offer any warranty that no factual errors are present. We take no responsibility for any direct or indirect actual or potential damage or loss suffered as a result of any inaccuracy or incompleteness of any kind in this presentation. We would, however, like to be told of any such errors in order to correct them. These forecasts are generated from a range of statistical techniques, including econometric models. They are subject to errors stemming from three main Source: measurement and statistical errors, which relate to raw data and the econometric model, as well as errors arising from assumptions regarding the future behaviour of explanatory variables. As a result, we place greater emphasis on trends and turning points than on precise values. Jones Lang LaSalle takes no responsibility for any damage or loss suffered by reason of the inaccuracy or incorrectness of this report.

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