The year 2020 was a major turning point for office property in the greater Paris region, as the pandemic period prompted many companies to review their real estate strategies... and reduce their floor space.

In a study entitled "Paris Moves," Cushman & Wakefield details the ins and outs of an ongoing real estate transformation.

“When there is movement, it tends to be downward,” — a slowdown in transactions and a reduction in space, observes Olivier Taupin, head of agency, office and industrial France at Cushman & Wakefield, noting an acceleration of the phenomenon since the health crisis.

In its most recent study, the brokerage reports a general slowdown in real estate activity by Paris Region companies over the 2021-2023 period compared to the pre-COVID period of 2017-2019, both in terms of volume and number of transactions.

The drop in demand is steepest among companies in the banking, finance and insurance sector (-42%), communication and creative sector (-38%) and industry (-24%), while those in the technology sector show the sharpest decline in the number of transactions (-38%).

According to the study, these declines can be explained by “a slowdown in the number of transactions, coupled with a sharp reduction in the unit size of leased space, due to companies' desire to optimize their office space as part of the regular adoption of hybrid working" for their employees.

The decline in demand is all the more worrying for commercial real estate owners as the real estate footprint of companies is declining in several sectors.

“Faced with the growing popularity of hybrid working methods, the trend is towards maximizing savings and minimizing square meters,” said Olivier Taupin, adding that “it will have taken a while for companies to get organized and take the measure of what lies ahead, and it's quite possible that 2024 will mark the high point in the reduction of floor space take-up.”

In its study, Cushman & Wakefield points out that between 55% and 70% of relocations and consolidations carried out since 2021 have resulted in a reduction in floor space, with a median reduction of between 15% and 30% across all sectors. Similarly, 56% of moves over 5,000 square meters have resulted in a reduction in floor space, compared with 37% before the health crisis.

“Not only is there less movement among companies, but when there is, it's smaller,” Taupin explained. For example, public companies reduced their real estate footprint by a median of 30% over the period, compared with 28% cutbacks for banks, financial institutions and insurers.

On the other hand, some fast-growing sectors have seen a sharp increase in real estate activity since the health crisis. This is the case for Luxury , where take-up (+59%) and the number of transactions (+44%) have exploded, and Life Sciences, with take-up (+48%) and the number of transactions (+8%) also on the rise. Booming - Deloitte estimates that sales of luxury goods in France will grow by around 21% in 2022, with a profit margin of 19.3% - luxury companies have increased their surface area in 63% of their real estate transactions since 2021.

According to Cushman & Wakefield, the reduction in companies' real estate footprint is largely due to the massive adoption of flex office, with new ways of working an undeniable driver for relocation.

“Many companies are taking advantage of the period to review the way they organize themselves, and are taking advantage of any move to implement telecommuting and flex office, in return for which they offer their employees a far superior experience to make them want to come back to the office”, Taupin said.

The study reveals that three-quarters of the moves observed among large companies in the Paris region involved a switch to flex office, which enables a reduction in the size of workstations and a reallocation in favor of shared spaces.

“Each move is accompanied by an adaptation to new work modes, with many more shared spaces and an increasing convergence towards hotel codes in terms of services offered," Taupin added.

By 2023, almost all business sectors will have adopted flex offices for their real estate movements over 5,000 square meters, with companies in the High-Tech Industry (100%), Banking, Finance & Insurance (94%) and Communications & Creative (90%) sectors showing the highest levels of adoption. The only exceptions are public institutions, at just 17%, and luxury companies, where Cushman & Wakefield has not recorded any flex office layouts in the last three years.

The search for centrality is at the heart of companies' real estate strategies, and may also partly explain the downward trend in take-up, Taupin notes.

In the first quarter, "Paris led the way with 54% of transactions. But if companies are moving back into Paris, it's not surprising that they'll be looking for less surface area to compensate for rising rents."

On the other hand, while 58% of large corporate moves over the past three years “have resulted in a more central location than at the outset, compared with 73% in 2022,” the rent differential between the inner suburbs and the capital is such that it “may put the brakes on some moves," he said, noting that “the rent differential between Paris and La Défense has never been so wide in the history of corporate real estate, whether we're talking about headline or economic rent.”

For all that, the Cushman & Wakefield study reveals no major upheavals in the profile of office tenants in the heart of the capital since the pandemic.

“Even if we tend to say that the Central Business District is expanding eastwards, which is not untrue given the rents charged, the Banking, Finance & Insurance, Luxury and Legal & Consulting sectors remain the predominant activities,” Taupin said.

A notable development is that technology companies are confirming their interest in moves into Paris, as evidenced by Cisco's lease from Issy-les-Moulineaux and Oracle's lease from Colombes, Taupin said.

This trend may be explained by the difficulties companies are experiencing in recruiting and retaining talent. With internet specialists and start-ups leading the way, the sector is becoming increasingly concentrated in central-eastern Paris, where it mingles with Communication-Creation companies.

Faced with such seemingly alarming trends in space reduction, it would be understandable to see some owners of tertiary assets become concerned. On the other hand, the horizon is not necessarily all gray, and Taupin even said a possible return of the pendulum in the other direction cannot be ruled out.

"As always, companies tend to over-react and over-anticipate,” he surmises. If the economy picks up, rates stabilize, inflation is halted and we see the same economic momentum as between 2017 and 2019, "it's a safe bet that companies will need more floor space.”