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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