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Commercial Real Estate Development and the “City Offer”
Jeremy.Kelly@eu.joneslanglasalle.com
8th February 2002
Gemaca II SeminarEconomic Performance of the Major European Metro Regions
Improving their Competitiveness
Project Conclusions
Demand Analysis(Renaud Diziain IAURIF)
Qualitative City Reviews
• Development Triggers• Location of Development• Characteristics of Development• Supply-side Constraints• Development Funding • Key Developers / Investors
Quantitative Analysis
Office Completions
Economic GrowthVacancy RatesRental GrowthGross Returns
Commercial Real Estate Development and the “City Offer” – Project Approach
FrankfurtFrankfurt
DusseldorfDusseldorf
BrusselsBrussels
ParisParis
RandstadRandstadLondonLondon
DublinDublin
EdinburghEdinburgh
Coverage: North West Europe8 Metro Areas
Paris 44.3London 27.1Randstad 16.0Brussels 10.6Frankfurt 10.1Dusseldorf 5.2Dublin 2.0Edinburgh 2.0
Office Stock (mill sqm)
1. Office Development Analysis
0
500
1000
1500
2000
2500
3000
3500
4000
4500
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 '00 '01 '020
1
2
3
4
5
6‘000 sqm %
Source: Jones Lang LaSalle, August 2001
Completions% of Stock
Office Completions in the 8 Metro Areas
Development Triggers: Office Completions and Economic Growth
-1
0
1
2
3
4
5
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; ERECO, July 2001
Completions % of stockGVA Growth
% 8 Metro Areas
Development Triggers: Office Completions and Vacancy Rates
0
1
2
3
4
5
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 '00 '01 '020
1
2
3
4
5
6
7
8
9
10
Completions(% of Stock) Vacancy Rate (%)
CompletionsVacancy Rates
Source: Jones Lang LaSalle, August 2001
8 Metro Areas
Development Triggers: Office Completions and Prime Rental Growth
0
1
2
3
4
5
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 '00 '01 '02-20
-10
0
10
20
30Rental Change (%)
CompletionsRental Growth
Source: Jones Lang LaSalle, August 2001
8 Metro AreasCompletions(% of Stock)
Development Triggers: Office Completions and Gross Returns
0
1
2
3
4
5
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 '00 '01 '02-15
-10
-5
0
5
10
15
20
25
30
Completions(% of Stock) Gross Returns (%)
CompletionsGross Returns
Source: Jones Lang LaSalle, August 2001
8 Metro Areas
Development Response: Peak of Cycles
87 88 89 90 91 92 93 94 95 96 97 98 99 '00 '01 '02
Com
plet
ions
FRA BRU EDIDUBDUSLON
PARRAN
PAREDIFRA
BRUDUSLONPARRAN
Development Response: Office Completions
4.4
3.1
3.0
5.0
2.9
4.7
2.9
4.8
1.9
2.6
2.7
2.8
2.9
3.2
3.7
9.8
0 1 2 3 4 5 6
Dublin
Brussels
Dusseldorf
Randstad
London
Frankfurt
Edinburgh
Paris
10
9.8
Development Cycles Compared
98 – 02
88 - 92
% of Stock pa
Source: Jones Lang LaSalle,August 2001
Development Response: Volatility of Office Completions 1986 - 2002
1
2
3
4
5
6
0.00 0.01 0.02 0.03 0.04 0.05
Com
plet
ions
% p
.a
Standard Deviation
Source: Jones Lang LaSalle, August 2001
BRU
RANEDI FRA
PARLON
DUS
DUB
Least Volatile Markets
Development Triggers: Supply Responsiveness 1998 - 2002
DublinBrusselsDusseldorfFrankfurtParisLondonEdinburgh Randstad
Economic Growth
VacancyRates
RentalGrowth
GrossReturns
====X
==X=naX
==XXX
====X
X=
Over responseUnder responseMeasured response
Supply Responsiveness – Current Cycle (1998 – 2002)
High development activity reflecting strong economic growth
But analysis indicates development market may have “over-responded”
Low supply-side volatility (historically)
Increasing supply side response in current cycle – driven by EU demand
Above average supply side response, despite relatively weak economic and market fundamentals
Dublin
Brussels
Dusseldorf
Supply Responsiveness – Current Cycle (1998 – 2002)
Measured response in current development cycle.Reaction to stronger supply side response in last development cycle
Measured supply-side response
Relatively stable supply side response Analysis indicated “under response” in current cycleBUT increasing focus on Amsterdam
FrankfurtLondonParis
Edinburgh
Randstad
‘80 ‘01
Rental Evolution 1980 – 2001: Cyclical Markets
London
Paris
Dusseldorf
Frankfurt
‘80 ‘01 ‘80 ‘01
‘80 ‘01
Randstad
Brussels
Dublin
Edinburgh
Rental Evolution 1980 – 2001: Stepped Growth
‘80 ‘01 ‘80 ‘01
‘80 ‘01 ‘80 ‘01
DublinFrankfurtLondonParis
2. City Reviews
Dublin• Very strong supply-side response during both development cycles
• Response to strong economy and structural changes
• 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
02468
1012
88-92 98-02
Dublin
Europe
Frankfurt• Measured supply-side response in the current cycle • Frankfurt aggressively establishing itself as a financial centre
– 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
0
1
2
3
4
5
88-92 98-02
Frankfurt
Europe
London• London saw very strong supply-side response in last
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
0123456
88-92 98-02
London
Europe
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.
• 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 ofFinance/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.
0
1
2
3
4
5
88-92 98-02
Paris
Europe
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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