For France’s oldest real estate investment trust, central Paris-focused Société Foncière Lyonnaise, 2022 was a record year: 99.5% occupancy and like-for-like rental growth of 7.8% per annum.
The high occupancy in its portfolio is reflected in the wider Paris Centre Ouest submarket, where vacancy has been hovering around 4% for the last five years. This sharply contrasts with the inner rim submarkets, known as the Première Couronne Nord, of Aubervilliers, Clichy, Saint-Ouen and Saint-Denis, where over the same five years vacancy shot up to 25%.
The four cities just north of Paris can be reached within half an hour from the centre and are mostly part of the Seine-Saint-Denis department. They are among the main beneficiaries of the massive Grand Paris Express infrastructure project which will add almost 200 kilometres of track to the existing metro network.
One of the first completed projects was the extension of the popular Line 14 from Gare-Saint-Lazare to Saint-Ouen in 2020, while the new metro lines 15, due in 2030, and 16, due in 2028, connect them to other suburbs bypassing central Paris altogether.
When Paris was awarded the 2024 Olympic Games in 2017, the Stade de France in Saint-Denis was picked to become the Olympic Stadium and Saint-Ouen and Saint-Denis were chosen as the site of the Athletes’ Village.
The huge infrastructure investment triggered a frenzy in office development. Around 510,000 square metre of offices has been delivered over the past five years in Première Couronne Nord, mostly concentrated in Saint-Ouen and Saint-Denis, among them several massive buildings such as Stories (61,260 square metres), developed by AXA IM Alts, and Paris Pleyel (36,700 square metres), developed by Pleyel Investissement.
Investors have been very active mostly through forward funding arrangements, and investment exceeded €1 billion per year from 2018 to 2021. Prices increased quickly reaching €8,500 per square metre in Saint-Denis and up to €10,000 in Clichy and Saint-Ouen, while yields fell to between 3.0%-3.5% for assets secured by long-term leases.
In hindsight, the timing for completion was not perfect. First the pandemic reduced economic activity and when markets bounced back post-pandemic, occupiers favoured high-quality buildings in central locations, a trend seen across markets. For example, in the UK demand for the very best space held up well in 2022 amid subdued conditions elsewhere. In addition, tenants consolidating into better locations and environmental, social and corporate governance, compliant buildings were often taking less new space than they left behind and the share of larger deals declined. As a result, larger floorplate buildings were more difficult to lease up, as demonstrated in Glasgow where vacancies soared in offices with the biggest floors.
Paris is witnessing a similar slow market for larger lease deals and even in La Défense lease transactions were seldom over 15,000 square metres. As a result, large developments like Stories and Paris Pleyel will now need to find more tenants to fill up the buildings.
The rapid rise of the vacancy rate in Première Couronne Nord and the hesitant take-up of new space has made investors reduce their activities with investment volume down 35% year-on-year in 2022. On the other hand, the development pipeline is shrinking with almost no new projects added because investors and developers are not willing to launch speculative building. This situation should allow the market to eventually absorb the new space albeit at a slower pace.
On a positive note, French office REIT Gecina reported 12.6% like-for-like net rental growth in La Défense on the back of a significant increase in the occupancy rates of their recently restructured buildings Carré Michelet and Adamas. With almost no space available in the central business district where top rents now quote €1,000 per square metre, momentum seems to be building for new high-quality buildings in adjacent markets such as La Défense, Neuilly-Levallois, and maybe also in the northern inner rim markets. Particularly, as the 2024 Olympic Summer Games draw nearer, they will soon be in the world’s spotlight.