Research Spain Q2 2021 SPOTLIGHT Madrid O ces Savills Research
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Madrid Offices Research Spain – Q2 2021 SPOTLIGHT Savills Research
Transcript of Research Spain Q2 2021 SPOTLIGHT Madrid O ces Savills Research
Madrid Offices
Research Spain – Q2 2021
SPOTLIGHT
Savills Research
Spotlight Madrid Offices Q2 2021
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Economic OverviewThe end of the second state of emergency in May has reactivated part of the economy. The lifting of mobility restrictions and the start of the de-escalation, alongside the positive rate of the vaccine rollout, have boosted Spain’s economic situation.
The recovery of household consumption and tourism will be the main drivers of economic development.
According to Focus Economics’ forecast for July, the economy will grow by more than 18.6% in Q2 compared to the same period of 2020 (which was already affected by the health crisis, when it contracted by 21.6%).
In the annual total, the projection has been improving moderately since February, standing at 5.8% in July. The figure for 2022 remains stable at around 5.7%.
With regards to the labour market, the latest Social Security enrolment data (June) continues the upward trend that began in March. The nearly 19.27 million people registered represent a 4.24% y-o-y increase, around 190,800 below the figure recorded in June 2019, when the pandemic was inconceivable.
The number of workers under the furlough system (ERTE) also continues to fall. The figure for June was 447,800, some 94,300 fewer than the previous month and barely one seventh of the more than 3.1 million in March 2020.
Take-up and DemandThe Madrid office market is starting to pick up. Between April and June, around 100,000 sq m were taken-up, 60% more than the volume registered in Q2 2020 (which was heavily impacted by the lockdown and health restrictions) and 20% more than in Q1 2021.
The number of transactions also increased in both the year-on-year (+39%) and quarter-on-quarter (+3%) comparison.
In the first half of the year, the growth was tempered by the Q1 2020 figures, which were barely affected by the health crisis. The 185,000 sq m was 7.5% higher than in H1 2020, with the 195 agreements representing a 13% increase in number of deals.
The average deal size, at around 960 sq m, remained in line with the 1,000 sq m of H1 2020.
Activity by Market ZoneThe increase in availability within the M-30 is attracting part of the business sector back to the urban area, mainly companies with a demand for space of <1,000 sq m.
52% of transactions registered between January and June took place in the central hub of the city, although it accounted for only 40% of the total take-up.
Big companies that require larger premises (>1,000 sq m) mostly opted for peripheral locations, where it is easier to find large spaces in quality buildings.
Decentralised areas also provide cost savings via rents, but it is essential that the new headquarters be located in a consolidated zone, with services and easy access by public transport.
Activity SectorThe broad range of firms in the professional services sector continues to account for the bulk of market activity, both in terms of take-up (31%) and number of deals (26%), but several sectors deserve special attention.
Among them, Public Administration maintained activity (five deals in H1, all with >1,000 sq m), although it did not represent a significant percentage of the take-up volume.
Meanwhile, Industry and Manufacturing accounted for just over 31,000 sq m of take-up, 31% higher than the figure recorded in H1 2020, with a similar number of deals.
Finally, Banking and Finance made up 27% more deals in H1 2021 than in 2020, albeit in smaller transactions, as its share of take-up (around 13,000 sq m) fell two percentage points from the previous year.
The take-up of 100,000 sq m in Q2 represented a growth of 60% y-o-y and 20% q-o-q. The cumulative figure in H1 stood at 185,000 sq m
Madrid Offices
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Spotlight Madrid Offices Q2 2021
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end of Q2 accounted for 9.73% of the total stock, two tenths of a percentage point more than at the end of Q1.
The completion of new development projects, such as Ed. Perennius in Pozuelo, and comprehensive refurbishment works such as Paseo de la Castellana 83, have led to an influx of almost 91,000 sq m of space into the Madrid stock (13.96 million sq m). This represents the largest year-on-year increase in Madrid’s stock since the end of 2019, with +2.34%.
The vacancy rate within the Madrid hub is still less than half of that located outside the city: almost 6% vs. 12.17%. The Prime area, which is very sensitive to small increases in vacancy due to its reduced stock, stands at a 7.4% vacancy rate. Meanwhile, the CBD was the only area where supply decreased compared to the previous quarter, from 6.3% in Q1 2021 to 5.5% in Q2 2021.
Outside the M-30, the most striking increase in vacancy took place in the A6, the area in the outer periphery with the best market performance, particularly the Las Rozas submarket, which registered a rise in supply by almost 15,000 sq m. Even so, the A6 zone still has the lowest vacancy rate of 10% (without taking Ctra. De Colmenar into account). Future SupplyOver the next 18 months, just over 320,000 sq m are expected to enter the market from eight new development projects (167,000 sq m) and 23 comprehensive refurbishment projects (156,000 square meters).
So far, 63% of the total is available (202,000 sq m), as the remaining 37% will be taken up by tenants who have signed pre-let contracts in recent months, or by tenants who will occupy their own headquarters. In fact, the three largest projects in terms of committed space are self-developed:
Acciona, in the former Banesto headquarters in the northern part of the market; Catalana Occidente, in the Méndez Álvaro growth area; and Metro Madrid, which will shortly be moving to a new building in the vicinity of Plaza de Castilla.
Of the new vacant space, 44% will be concentrated within the M-30 (89,000 sq m), distributed across 16 projects. In terms of volume, of particular interest are the nearly 17,000 sq m on Velázquez 86D, which will be ready by the end of 2021, and the 13,000 sq m of the office complex that Acciona is developing with Foster + Partners in a former gas plant on Méndez Álvaro.
Outside the M-30, the eastern area is the most notable, with close to 67,000 sq m (58% of the periphery). The OM∞ building in MadBit will bring an additional 36,500 sq m to the area by the end of 2021, and Mesena 80, with close to 18,000 sq m, will increase the supply in Arturo Soria.
RentsThe average closing rent for Q2 (calculated using all data collected from transactions in business buildings) stood at €17.25 per sq m/month, which continues in line with the previous quarter as it only dropped by 0.36%. However, in the year-on-year comparison the decrease was slightly more than 8.50%.
The decline affected almost all market areas, although the sharpest decrease was in the A1, which was more than 15%.
Asking rents, on the other hand, remain stable compared to the pre-COVID period, although the increase in concessions during negotiations (rent-free periods, contribution to works and other incentives) has led to a reduction in the real closing values.
52% of transactions took place in the central hub, although big companies, which generally use larger spaces, opt for locations
further away from the centre, where they can find large offices at lower rents
Main Deals - Occupiers Market Q2 2021
Tenant Market Zone Floor Area (sq m) Activity Sector
Inetum North 8,800 IT
Indra Sistemas A1 5,400 IT
Evolution Gaming* A1 5,100 IT
Beam Suntory Northeast 4,300 Industry-Manufacture
Networkia CBD 3,100 Business Services
Source Savills Aguirre Newman
Flexible OfficesFlexible space operators are resuming their expansion plans, which have been almost at a standstill since the onset of the health crisis. During H1, nearly 13,000 sq m were registered across six deals. During these uncertain times, when there is not yet enough evidence to determine the future space requirements in the short and medium term, flexible offices are an ideal solution.
The profile of companies opting for workstations within flexible offices has shifted from start-ups to conservative sectors generally linked to traditional offices, such as law firms.
Today’s occupiers of flexible spaces are not as linked by their sector of activity (although most are still tech and creativity & design companies) nor size (with freelancers and start-ups also occupying these spaces with few employees). Rather, occupiers are distinguished by their new approach to the way they work, in which flexibility both in terms of working hours and geographical mobility is predominant.
Workplace location is a key factor in this business. Easily accessible areas, generally located in the city centre or urban zones, are the most sought-after with the highest occupancy rates. However, decentralised offices are an option for companies that want to have satellite spaces close to employees’ homes.
The different models are still in the definition phase, pending the lifting of social distancing restrictions in enclosed spaces, and once work methods after the state of emergency have been established. In anticipation of this, many companies are already conducting employee surveys to identify preferences and needs, which will determine the degree of face-to-face and flexible working in the future.
In terms of lease period, the advantage of flexible spaces over traditional offices is the shorter contracts, which are highly valued. It is worth noting that there are one or two-year contracts, but short renewable contracts (generally month-to-month) are becoming more common.
Stock and Current SupplyFor the sixth consecutive quarter, the first half of the year ended with a further increase in available supply. Almost 1.36 million square metres of vacant space at the
de tamaño medio de las operaciones <10.000 m² registradas hasta septiembre (+11% respecto al nivel de 2018)
Yo hablaría del incremento de actividad del Sector Público, sanidad, etc... Te propongo algo como : "Destacar el incremento de la demanda en 2020 especialmente del sector público, empresas relacionadas con la tecnología y la sanidad"
Spotlight Madrid Offices Q2 2021
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Future Supply by Marketing Status - 2021 - 2022
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Investment in the Madrid Office Market
However, the best positioned product would be a quality asset, generally located in consolidated areas, with services and easy access by public transport (among which the metro is particularly valued).
Additionally, buildings that have a sustainability certification and take care of aspects such as air renewal and filtering (issues that are especially valued nowadays) gain points in a comparative analysis against the competition. In fact, according to internal data, the rental performance in buildings with a sustainable certificate exceeded €2 per sq m/month in 2020 compared to the rest of the market, and in the historical series, the average deal size in green buildings is 42% higher than those without seals.
In terms of achievable values, Prime CBD fell to €34 per sq m/month, a year-on-year adjustment of almost 3%. The secondary area outside the M-30 also decreased compared to the previous quarter to €11.25 per sq m/month, down 10% compared to Q2 2020. Both the secondary area within the M-30 and prime outside the M-30 remained at the same level as the previous quarter, with €23.75 per sq m/month and €17.75 per sq m/month respectively, while the average year-on-year adjustment stood at around 3.5%.
InvestmentThe economy has been making steady progress since the end of the second state of emergency and remains closely linked to the evolution of the health crisis. Despite the looming shadow of new variants, the epidemiological situation appears to be under control with the vaccination campaign progressing well. This will act as a stimulus for economic activity.
Meanwhile, the business sector is already preparing for a widespread return to the office. According to data collected in Spain (by a European survey for the Office FiT report), 94% of participants considered that going to the office is necessary to ensure the success of the business. Flexibility is an increasingly valued aspect, as the vast majority (97%) would prefer to keep working remotely for a few days. The most popular choice, with 43% of the total, was two days working from home.
During the first months of lockdown, there was some talk of the pandemic resulting in the end of office buildings, but this has turned out to not be the case. The specific
Asking rents remain at pre-COVID levels, but the rise in concessions is resulting in the decline of closing values
Spotlight Madrid Offices Q2 2021
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Main Deals - Investment Market Q2 2021
Source Savills Aguirre Newman
Madrid accounted for only €200m of investment (20% of the national total). The main obstacle to reinvigorating the office market is the
scarcity of product, which contrasts with the high volume of liquidity and buying pressure
needs of each company and employee will determine the most appropriate way of working at any given time, which will surely change according to the circumstances.
Where there seems to be consensus is that the office is essential to strengthen corporate culture and the feeling of belonging to a group. There is also a strong indication that offices will extend their traditional functionality, acting as a focal point for personal connection and fostering teamwork, for which it will be necessary to increase the spaces for interaction and collaboration.
Against this backdrop, confidence in the office market will be reflected by the recovery in the investment market. During the first half of the year, around €1,030m was registered, of which around 20% was transacted in Madrid (just over €200m). Madrid’s modest participation in the investment market in 2021 is far from the levels of the historical series, which reaches 67% on average.
However, the volume in Q2 (close to €120m) was more than double the figure recorded in the same quarter of 2020 and a quarter-on-quarter growth of 50%.
After a year in which the office market has faced major challenges, investors are still cautious, although quality buildings with sustainability certifications, good location, good covenant and long-term contracts have overcome the issues of the health crisis.
The main obstacle delaying the revitalisation of the Madrid market is the shortage of product, which contrasts with the high volume of liquidity and buying pressure. The focus of investors remains on core product, with long-term contracts in Prime CBD locations or in the immediate vicinity, but there are currently no mandates that meet all the requirements.
The type of product transacted fits into the core category as they are leased buildings, but with peripheral or secondary locations within the M-30. It should also be taken into account that the period for reaching agreements has been extended. Product with available space, especially if it is not located in a consolidated area, results in reluctance on the part of investors.
As for value added assets, i.e. new developments and buildings pending
Outlook
• With most of the workforce fully vaccinated, the end of the summer holiday period will coincide with the return to the office for many of the companies that still do much of their business remotely.
• A hybrid format between face-to-face and remote working will most likely continue for a few months, until the working model that best suits each sector and department is identified, which will define the real space needs in the short and medium term.
• It is important to note that, while some companies will opt to downsize in terms of space, constant revision of their estimates indicates that the release of second-hand office space will be more limited than anticipated a year ago, which will curb the increase in the vacancy rate.
• Moderate supply inflows will alleviate pressure on rental values, mainly in consolidated locations. Areas further away from the centre, difficult to access and with weak fundamentals, will continue the downward trend.
• From September onwards, with the vaccination process almost complete and back-to- office policies in place, a significant reactivation of the investment market is expected.
• All of the mandated product is located within the M-30, and just over 80% of the expected closing volume until the end of the year corresponds to core and core+ product, which is anticipated to be well received by investors.
Asset Market Zone Purchaser Vendor
Ulises, 16 East Kennedy Wilson Merlin Properties Socimi
Lérida, 32 Urban Area Private Investor Ardian Real Estate
Konecta HQ A1 Confidential Castellana Properties Socimi
Exc. Building in Center Zone Urban Area Confidential Confidential
refurbishment, they do not easily fit into the current market, which is still stifled by access to financing and the investors’ approach to certain price adjustments.
YieldsBuying pressure and the scarcity of product for sale has put downward pressure on prime asset yields, as long as they are core product in well-established locations with a good covenant and a long-term contract. Prime CBD currently stands at 3.10%, with Prime outside the M-30 at 4.60%.
Capital values could undergo some adjustments due to the expected contraction in rents and the greater flexibility in the new lease conditions, with longer rent-free periods, staggered rents and subsidies for refurbishments and fit out works.
Savills plcSavills is a leading global real estate service provider listed on the London Stock Exchange. The company, established in 1855, has a rich heritage with unrivalled growth. It is a company that leads rather than follows, and now has over 600 offices and associates throughout the Americas, Europe, Asia Pacific, Africa and the Middle East.This bulletin is for general informative purposes only. Savills accepts no liability whatsover for any direct or consequential loss arising from its use. It is strictly copyright and reproduction of the whole or part of it in any form is prohibited without permission from Savills Research. © Savills Commercial Ltd.
Ana ZavalaDirector Office Leasing+34 91 319 13 [email protected]
Research
Gema de la FuenteResearch+34 91 319 13 [email protected]
Ángel EstebaranzDirector Office Leasing+34 91 319 13 [email protected]
Elisa EstacaAssociate Director Capital Markets+34 91 319 13 [email protected]
Pelayo BarrosoResearch+34 91 319 13 [email protected]
Isabel GilResearch+34 91 319 13 [email protected]
Savills Aguirre Newman ResearchWe carry out a thorough and objective analysis of the real estate market in order to provide our clients with accurate information on the current situation in each of the sectors, helping them make the right decisions at each moment.
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