Trees don't go up to the sky
Retired of inflation and accompanying measures, “prime” rents in Paris intramural, the alpha and omega of the profession, have been remarkably stable for 20 years, thus confirming the effectiveness of business real estate as a tool to protect against inflation... but at the same time contradicting the forecasts of the profession on the imminent crossing of the symbolic bar of 1,000€ HT/m² in Paris.
The office rental market in Paris is therefore not growing, but is changing.
In addition to certain transactions that act as “markers” (for example the lease by Goldman Sachs throughout Avenue Kléber belonging to SFL for a “premium” rent of €940 (excluding tax/m²), when will there be market statistics showing the evolution of demand in value, adjusted for inflation and accompanying measures, which would be the least we could do for a Parisian market described as hypertransparent?
The market indicators currently provided by French operators, applied to a car manufacturer, would be similar to providing the price of its top-of-the-range model and the best equipped with options... as “guidelines” on the trend of its turnover or profitability! Difficult to form a conviction under these conditions...
A confirmed disconnect between rental value and market value
The phenomenon of desynchronization between the evolution of commercial office values in Paris and the situation of the real economy is continuing. It is mainly fuelled by the very low level of interest rates and not by the quality of rental conditions.
Firm leases have no more farms than the name.
Indeed, the firm duration of leases is only in name, since in 2020 as after each crisis (2000-2001, 2008-2009, 2015), renegotiations during the lease were high on the agenda of general managers wishing to reduce their costs.
How long will this phenomenon last? Patrick Artus answers: as long as interest rates are very low... and they will be so permanently, i.e. for the next five years...
Hotel reconversion: a new El Dorado?
While the redevelopment of offices into housing, attractive politically and on paper, is complex and expensive to carry out (successful examples remain few), the question of the future of many hotels, especially in Paris, which has been hit by several months of closure, will arise.
In Île-de-France, 2,300 hotels will change hands in the coming ten years due to the age of their owner-operator.
In Paris and Île-de-France, many hotels are still owned by private owners. In the next ten years (source CCI), 2,300 hotels with fewer than 50 employees (71% located in Paris) will be transferred, due to the age of their owner-operator.
The harshness of the year 2020 could accelerate this movement: the conversion of hotels into housing or offices, studied by us in recent real cases, is quite simple, modulo the question of personnel. At the moment, we are seeing few forced sales, but rather an adjustment in values, waiting for the walls of these companies to be sold, but to perhaps make them something other than a hotel...
Coworking is dead, long live coworking!
Similar to the SaaS (Software as a Service) revolution, which supplanted software architectures based on the stacking of layers (server/license/maintenance/integration) in the 2000s, the emergence of coworking strongly shook the real estate industry between 2015 and 2020, well beyond the modest 3 to 4% that its share of the number of major international cities reached between 2015 and 2020, well beyond the modest 3 to 4% that its share of the number of major international cities reached (before Covid).
Threatened in its revival by the levels of density that its economic model requires to be profitable (see the movement to refocus WeWorktowards city centers, in order to compensate for the dedensification of its spaces (by higher prices per station), post-Covid coworking will have to play the card of outsourcing rather of flexibilization. Indeed, faced with teleworking, which adds an additional dose of complexity in the management of workspaces, and the technological enrichment of square meters, companies will want to outsource the management of their buildings (and associated personnel) to “turnkey” operators.
Preferring a promise of managing complexity over flexibility: this is the industry's martingale.
This is where the future of the industry is and it is likely that consolidation movements will occur in the coming months, at the initiative of owners, property management players or intermediation companies, looking for growth drivers that are less risky than the business of the transaction, like what they have initiated in the field of facilities management.
The return to favor of sale and leaseback
Swimming in an ocean of cash, companies, including the least well-off among them, will paradoxically rediscover the virtues of sale and leaseback operations, reimbursing PGE and reducing margins.
In the United States, sale and leaseback is as important as the real estate investment market in Germany... It is a financing modality in its own right and not a lifesaver for “distressed” companies, as is the perception in continental Europe.
Much more than a cancellation, sale and leaseback is a very long-term method of financing (20 to 25 years), backed by lease contracts, whose plastic and ductile nature, we recall in the next point.
While banks, faced with an inevitable increase in their risk provisions in 2021, will restrict and tighten their credit conditions, companies will turn to these alternative financing methods, including to finance turnkey operations.
A confirmed plasticity of the lease contract
One of
the key words of the year was resilience. Our good old commercial lease is illustrative of this word. Although more than 60 years old, this legal support proves its plasticity and its ability to reflect market changes.The supposed “rigidity” of commercial leases comes much more from deep-seated market practices than from the constraints inherent in this type of contract.
Its supposed rigidity comes primarily from “market practices” that vary according to the balance of power between the taker/lessor, which must be called into question through well-conducted negotiation processes and with the help of advice. Legal support, on the other hand, can meet almost any request and configuration... and meet all needs.
As soon as the evaluators stop capitalizing unlimited rental income while checking the presence of a few standard clauses, the sacred cow that the triple net investor lease constitutes will be replaced by indicators that are more diverse and closer to the hotel industry, much better able to account for the quality of a real estate asset: level of use of square meters, average EBIT of the building's tenants, alignment between the Walts contracted and actually observed, marketing time of vacancies, energy performance, etc.
Teleworking is becoming a reality Long
gone (2017) the time of the Labor Law or the El Khomri Law when the right to disconnect was presented as a major social advance! Officially appearing in Europe in 2002 in the form of a framework agreement, teleworking really took off in France in 2020.
Evolving from the status of a facility granted to deserving employees who are considered workers to the more appreciable status of an assumed and widespread modality, teleworking became a social, economic and organizational reality at the end of the gigantic two-month “Proof of Concept”, caused by the first lockdown.
Beyond the debates between ancient and modern, there is one certainty: the sustainable anchoring of teleworking in practices, up to one to two days a week, will have a lasting impact on demand.
Beyond the debates between “too-workers” (hard-working people, led by the big local real estate companies who make “small talks” about the coffee machine the reason their offices exist) and “teleworkers” (supporters of the total virtualization of social relations), teleworking will find its rhythm, around a gauge frequently estimated at two days a week... So neither a big evening, nor the status quo, but the reinforcement and amplification of an evolution that dates back several years years.
Where is the novelty? It is the fact that these two weekly days will be more systematically taken and teleworked. Lessons learned for example bySodexo and its competitors RIE operators: a sustainable drop in the number of visitors to their installations by 25%, with serious strategic challenges as a result. If RIE operators see 25% fewer customers in their facilities, what about office owners?
Fewer square meters, but more feature-rich square meters
The two periods of confinement struck the minds of general managers: crossing empty floors, they realized how much their office space could be akin to expensive capital, because it was well misused.
This observation, combined with the deployment of remote working, will necessarily result in a deflationary impact on take-up. Barclay's, in a study dated September 2020, estimated it at -10 to -20% of the demand for square meters within ten years in Europe, Capital Economics at -20 to -25% on the revenues of the European real estate industry over the next five to ten years.
Fewer square meters, but square meters that are richer in technological content and therefore more expensive.
However, these lower volume requirements will result in a higher cost of these square meters (“less, but better”) due to the more systematic deployment of technologies and services allowing:
- to measure the use of these surfaces;
- to facilitate their use by employees who now understand the spaces according to what they have to do there;
- to work more fluidly in hybrid mode.
By way of illustration, the implementation of sensors coupled with an application for reserving a workstation increases the cost of a workstation by approximately 13%. Likewise, equipping meeting rooms with audio-video systems, making it easier to hold meetings with teams in person and remotely, reduces the cost of partitions to a trivial amount of money.
Beyond the volume and value of square meters, there is the question of the limits of services and the contours of the offer of real estate owners. Without defusing the next point, we are convinced that owners and investors will benefit from broadening their range of services to businesses and marketing, where appropriate, equipped and ready-to-use buildings, rather than bare floors, in a “shell & core” way. The success of Covivio on a recent project in the 13th arrondissement of Paris testifies to this.
Property owners and landowners: the service revolution?
Covivio with Wellio, Icade with Imagin'Office, AG Real Estate with its Plug & Work concept, Primonial With the appointment of a Customer Relations Manager, examples of marketing and commercial initiatives by real estate companies aimed at rebuilding their relationships with users, now promoted to the rank of customers, are booming, with a certain acceleration over the last 18 months.
This new “Client Centricity” is reinforced by the shocks suffered by Unibail-Westfield, which remind us that stone does not immunize against shareholder revolts and strategic turnarounds, even among the most powerful and most established.
If real estate companies do not want to suffer the same meaning as banks, they will have to go from supply-side marketing (I have a building in the right place) to demand marketing (how can I address your needs and become your “Trusted Landlord”), by experimenting as much as possible, as many of them do, without looking for their salvation in the simple purchase of start-ups, making it possible to replicate the annual report.
From this point of view, all the initiatives and transformation plans that the social housing sector is deploying are interesting. Quietly, the latter has begun its radical transformation and many lessons are fruitful for “capitalist” real estate companies.