Gemaca II Seminar
Economic Performance of the Major European Metro Regions
Improving their Competitiveness
Commercial Real Estate Development
and the “City Offer”
Jeremy.Kelly@eu.joneslanglasalle.com
8th February 2002
Commercial Real Estate Development
and the “City Offer” – Project Approach
Qualitative
City Reviews
Quantitative
Analysis
Office Completions
Economic Growth
Vacancy Rates
Rental Growth
Gross Returns
Demand
Analysis
(Renaud Diziain
IAURIF)
•
•
•
•
•
•
Project
Conclusions
Development Triggers
Location of Development
Characteristics of Development
Supply-side Constraints
Development Funding
Key Developers / Investors
Coverage: North West Europe
8 Metro Areas
Office Stock
(mill sqm)
Edinburgh
Dublin
Randstad
London
Dusseldorf
Brussels
Paris
Frankfurt
Paris
London
Randstad
Brussels
Frankfurt
Dusseldorf
Dublin
Edinburgh
44.3
27.1
16.0
10.6
10.1
5.2
2.0
2.0
1. Office Development Analysis
Office Completions in the 8 Metro Areas
%
6
‘000 sqm
4500
4000
3500
Completions
% of Stock
3000
5
4
2500
3
2000
1500
2
1000
1
500
0
0
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 '00 '01 '02
Source: Jones Lang LaSalle, August 2001
Development Triggers:
Office Completions and Economic Growth
%
5
4
8 Metro Areas
Completions % of stock
GVA Growth
3
2
1
0
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 '00 '01 '02
-1
Source: Jones Lang LaSalle, August 2001; ERECO, July 2001
Development Triggers:
Office Completions and Vacancy Rates
Completions
(% of Stock)
5
4
Completions
Vacancy Rates
8 Metro Areas
Vacancy Rate (%)
10
9
8
7
3
6
5
2
4
3
1
2
1
0
0
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 '00 '01 '02
Source: Jones Lang LaSalle, August 2001
Development Triggers:
Office Completions and Prime Rental Growth
Completions
(% of Stock)
5
4
8 Metro Areas
Rental Change (%)
30
Completions
Rental Growth
20
3
10
2
0
1
-10
0
-20
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 '00 '01 '02
Source: Jones Lang LaSalle, August 2001
Development Triggers:
Office Completions and Gross Returns
Completions
(% of Stock)
5
4
8 Metro Areas
Completions
Gross Returns
Gross Returns (%)
30
25
20
15
3
10
5
2
0
-5
1
-10
-15
0
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 '00 '01 '02
Source: Jones Lang LaSalle, August 2001
Development Response: Peak of Cycles
BRU
DUS
PAR LON
EDI PAR
FRA RAN
Completions
DUB
PAR
FRA BRU EDI DUS
LON RAN
87
88
89
90
91
92
93
94
95
96
97
98
99
'00 '01 '02
Development Response: Office Completions
Development Cycles Compared
Dublin
4.8
Brussels
3.2
4.7
2.9
2.9
2.8
Randstad
London
2.7
Frankfurt
5.0
3.1
1.9
Paris
0
1
Source: Jones Lang LaSalle,August 2001
2
98 – 02
88 - 92
3.0
2.6
Edinburgh
% of Stock pa
4.4
3
9.8
3.7
2.9
Dusseldorf
9.8
4
5
6
10
Development Response:
Volatility of Office Completions 1986 - 2002
6
5
DUB
Least Volatile
Markets
4
DUS
BRU
3
RAN
EDI
2
1
0.00
PAR
0.01
Source: Jones Lang LaSalle, August 2001
LON
FRA
0.02
0.03
0.04
0.05
Development Triggers: Supply Responsiveness
1998 - 2002
Dublin
Brussels
Dusseldorf
Frankfurt
Paris
London
Edinburgh
Randstad
Economic
Growth
Vacancy
Rates
Rental
Growth
Gross
Returns



=
=
=
=
X


=
=
X
=
na
X



=
=
X
X
X



=
=
=
=
X
 Over response
X Under response
= Measured response
Supply Responsiveness –
Current Cycle (1998 – 2002)
Dublin
High development activity reflecting strong
economic growth
But analysis indicates development market may
have “over-responded”
Brussels
Low supply-side volatility (historically)
Increasing supply side response in current cycle –
driven by EU demand
Dusseldorf
Above average supply side response, despite
relatively weak economic and market fundamentals
Supply Responsiveness –
Current Cycle (1998 – 2002)
Frankfurt
London
Paris
Measured response in current development cycle.
Reaction to stronger supply side response in last
development cycle
Edinburgh Measured supply-side response
Randstad
Relatively stable supply side response
Analysis indicated “under response” in current cycle
BUT increasing focus on Amsterdam
Rental Evolution 1980 – 2001:
Cyclical Markets
Frankfurt
Paris
‘80
‘01
‘80
London
‘80
‘01
Dusseldorf
‘01
‘80
‘01
Rental Evolution 1980 – 2001:
Stepped Growth
Randstad
‘80
Dublin
‘01
Brussels
‘80
‘01
‘80
Edinburgh
‘01
‘80
‘01
2. City Reviews
Dublin
Frankfurt
London
Paris
Dublin
• Very strong supply-side response during both development cycles
12
10
8
6
4
2
0
• Response to strong economy and structural changes
Dublin
Europe
88-92
98-02
• Analysis indicates that market may have “over-responded” in current cycle
• Relatively centralised office stock (three-quarters is located in the CBD)
• Development focus :
- International Financial Services Centre – development zone during both cycles
- Business/Office Parks in the suburbs – feature of the current cycle – focused within the M50
- Cheaper ‘edge of prime’ district – central location important for access to labour market
• Levels of refurbishment remain low – even in city centre – as sites still available in Docklands
• Few constraints – apart from planning delays – outweighed by grants and tax incentives
• Cautious bank lending during the current cycle – also funding by Irish institutions, property co’s
• Primarily Irish investors and developers, but also UK players
• Low levels of international activity reflect small size of market and lack of international grade stock
Frankfurt
• Measured supply-side response in the current cycle
• Frankfurt aggressively establishing itself as a financial centre
5
Frankfurt
Europe
4
3
2
1
0
88-92
– reflected in authorities positive stance towards development.
• CBD/Banking District is the focus of development
• Growth in mixed use development
• Site assembly constrains development
• Future re-development of Frankfurt Station
• Authorities forcing developers to consider ecological impacts
• Investment dominated by German funds
• Increasing number of investors (funds, banks, insurance) are considering development
route
• Partnerships between developers/investors becoming more common
• Owner-occupation (est. 50%) is higher than in other cities
98-02
London
6
5
4
3
2
1
0
London
Europe
• London saw very strong supply-side response in last
88-92
98-02
development cycle (1988-92)
• Current supply-side response (1998-2002) is much lower, and more in line with expectations
• Relatively centralised office stock (2/3rds of Greater London stock is in CBD)
• Development focus:
- Docklands/Canary Wharf – benefiting from improved transport - developing critical mass –
attracting occupier with large requirements – more “front office” functions
- City – authorities responding to competition from Canary Wharf
- Rail Termini – Paddington Basin, Kings Cross, Waterloo/South Bank
• Quality of stock is high (40-45% of Central London stock is Grade A)
• Trend towards mixed-use development
• London is very open to outside players – UK or US developers have dominated activity
• Development traditionally funded/forward-sold to institutions (UK, German)
• Lenders/funders have been reluctant to finance speculative development
Paris
• Paris saw strong supply-side response in last cycle (88-92)
• During the most recent development upswing, response has
been more “measured” – reflecting weak market conditions of
late 1990s. Also higher levels of pre-letting.
5
Paris
Europe
4
3
2
1
0
88-92
98-02
• Tightly controlled urban planning has forced new development outside the CBD
• Development Focus:
- Established office satellites - La Defense/Golden Crescent
- Emerging zones – esp. north between CBD and CdG Airport (St Denis, Clichy, St Ouen)
- Government-backed schemes - Rive Gauche – occupiers attracted by Ministry of
Finance/French National Library
• New office developments is of higher standard – large floorplates, high technical spec,
design – but with low operating costs
• Balanced mix of domestic and international developers.
• US developers/funds have been very active. US funds forced into development
• International developers have tended to take greater risks.
Conclusions
• Real Estate product & prices do play a role in city
competitiveness
• “Global Competitiveness” underpins many master plans
• Ability to accommodate large corporate occupiers is seen as a
key competitive advantage
• New office development focussed on transport interchanges,
CBD fringe, out-of-town
• But analysis has shown that different supply side responses have
not significantly affected city competitiveness
• Other factors play a greater role in corporate location decision
making – communications, labour force, regulation
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