Office Market Report JLL Research Report. San José, Costa Rica

Transcription

1 Office Market Report 2017 JLL Research Report San José, Costa Rica

2 2 Office Market Report San Jose, Costa Rica 2017 Macroeconomic Overview The Costa Rican economy continued to perform very well in 2017, maintaining a reassuring trend that has been observed over the past two years. The economy is expected to grow by 4% in 2017, making it one of the strongest economies in the region. An improving global economic context has been the key to this rebound, with growth driven by exports to the US and Europe. Agricultural exports and tourism have especially led the way, which together were up 8.6% over the previous year. Inflation increased to about 1.4% in 2017 after essentially a year of deflation. Further expected depreciation of the Colon should lead to higher import prices, putting upward pressure on inflation but keeping it within the Central Bank s target range of 1-3%. The Colon has fallen 3% against the US Dollar this year. To prevent a larger depreciation, the Central Bank has raised interested rates from 1.75% to 4.5% between April and June with the objective of encouraging more saving in local currency with less borrowing. The key political issue in Costa Rica remains a growing government deficit that multiple administrations have failed to address. The Costa Rican Central Bank estimates that the budget deficit is now at 5.5% of the country s GDP. This year President Solis passed a budget proposal for USD $16 billion, with debt payments accounting for one third of that amount. In early 2017 Moody s downgraded Costa Rican debt from Ba1 to Ba2, citing a lack of political consensus to implement measures to reduce the persistently high fiscal deficit. The increasing debt has Other Goods Exports 1% Fuels and Mining 1% Travel and Tourism 19% BPO and Other Commercial Services 21% Transport 2% Composition of Exports, 2017 Total Exports: USD $19.63 billion Source: Oxford Economics Agricultural Products 26% Manufactures 30% happened during a backdrop of steady growth, low inflation, and moderate interest rates, making a resolution an urgent matter to help Costa Rica plan for rainier days ahead. Solis has stressed the need for tax increases on individuals and companies, however a divided congress has kept him from passing any legislation. Also of mild concern is the risk of modifications to the Central American Free Trade Agreement, which gives Costa Rica favorable trade conditions with the US. However, considering the significant political capital that the Trump administration has invested into modifying NAFTA an agreement that governs a much larger flow of trade than CAFTA it is unlikely that pulling out of or changing CAFTA would become a priority for the United States. Costa Rica is preparing for a general election in February Early favorites are the PLN, the PIN, and the PUSC. With many candidates contenting, a second-round runoff is almost inevitable. At any rate, the election is unlikely to dramatically change the country s economic course. Source: Oxford Economics

3 3 Office Market Report San Jose, Costa Rica 2017 Market Overview Alejuela Heredia Santa Ana 18% Market Stock Distribution Cartago 0% Rohrmoser 10% Escazu 20% Heredia 36% Este 16% Santa Ana City of San Jose Tres Rios Cartago San Jose Submarkets growing rapidly, both in population and in prestige. The San Jose, Costa Rica office market contains nearly 1,100,000 m2 of investment-grade office space. This stock includes prime Class A buildings as well as Class AB buildings, which do not meet the same criteria but are still considered to be quality properties. San Jose is the second largest office market in Central America, behind Panama, and it ranks as the 11th largest market within the context of Latin America. The market is concentrated within 5 submarkets that stretch throughout the sprawling metropolitan area. Heredia, with 36% of the market stock, is a low-density suburb that stretches from the Juan Santamaria International Airport (SJO) in the northwest of the Greater Metropolitan Area to downtown San Jose. Heredia is characterized by having lots of available land for development, and a high concentration of horizontal business and industrial parks, many of which offer Free Trade Zone status. The second most concentrated submarket is Escazu, which is home to many companies working in finance and finance-related activities. Its central location and strong amenities make Escazu a favorite location for companies who are willing to pay an extra cost for image. Santa Ana is the westernmost submarket in San Jose, consisting of development along Route 147. This area is suburban but Rentable Area Rohrmoser is the area covering the western half of the inner city of San Jose, and is where many public sector agencies have their offices. It is also home to the national soccer stadium, several museums, and the city s largest park, however its real estate is generally old and outdated. The Este (East) submarket covers the eastern half of the inner city and stretches to the suburb of Tres Rios. This area is characterized by lower cost buildings and fewer amenities. Finally, an emerging submarket that will be covered in this report is the eastern suburb of Cartago: while there is no existing stock there today, there are important projects in development there. 1,600,000 1,400,000 1,200,000 1,000, , , , ,000 - San Jose Market Evolution Aggregate Stock Existing Buildings Existing Buildings

4 4 Office Market Report San Jose, Costa Rica 2017 Market Overview It is worth noting that San Jose is more a collection of smaller cities (i.e. San Ana, Escazu, Heredia, Alejuela, Tres Rios) than a large city itself. Furthermore, these towns often belong to different provinces within Costa Rica that converge around San Jose. Therefore companies should be aware that the submarket they are located in may have different laws depending on the province they are in, and this could have important implications for parking availability, public transportation, and other factors. San Jose has traditionally been one of the more stable markets within Latin America. Unlike other cities in the region who suffer from significant variations in supply and demand, San Jose rarely sees large fluctuations. The highest annual office production on record was approximately 90,000 m2 in 2012 and This is very mild compared to other places like Panama where annual production has surpassed 200,000 m2 frequently over the past few years. This stability is due in large part to strict lending requirements by local banks; developers must demostrate ample capital and demand for their projects before receiving development loans. For this reason, many projects in San Jose are built in phases, and construction begins once a pre-lease is signed. San Jose has seen relative oversupply over the past few years, with vacancy peaking in 2015 at 15%. This was a result of global economic instability at the time, mainly in key export countries like the United States and Europe, that contributed to a dampened demand. However in 2016 and 2017 the market has seen demand outpacing new supply, and this year the market has seen a record level of office demand, pushing vacancy down to 10%. Indicator Trend Stock (m 2 ) 1,100,000 Net absorption, 2017 (m 2 ) 99,000 Production, 2017 (m 2 ) 59,000 Under Construction (m 2 ) 134,000 Vacancy Rate 10.13% Total Vacant Area (m 2 ) 111,000 Asking Rent: Class A (USD/m 2 /month) $17 25 Asking Rent: Class AB (USD/m 2 /month) $ Cap Rates 9-12% Sample Size 190 buildings High demand being observed right now is due to several factors. One is the strong growth of the Costa Rican economy, which will surpass 4% growth for the second year in a row. Another factor is the organic growth among many companies operating in the market. This is especially true for multinational tenants, many of whom started in Costa Rica in the late 2000s and are now approaching the termination of their first lease. Finally, office consolidation has played an important role as well. With many companies split among multiple office throughout the city, the new buildings that are being completed many of which offer large, undivided floors and international building standards offer attractive alternatives for consolidation. Over the next few years, supply will remain within the normal range of 50,000-80,000 m2. Demand should remain strong at least through 2018, as some new buildings already have commitments from tenants. By 2020 JLL expects the vacancy rate to fall back to 8% as the market seems primed to swing back to a landlord-favorable context with low vacancy and rising rents. Historical Production, Absorption, and Vacancy Rentable Area (m2) 150, , ,000 90,000 70,000 50,000 30,000 10,000 Production (m2) Absorption (m2) Vacancy (%) Forecast 30% 25% 20% 15% 10% 5% Vacancy Rate (10,000) 0% Source: JLL Research (2017)

5 5 Office Market Report San Jose, Costa Rica 2017 Rentable Area (m2) 75,000 65,000 55,000 45,000 35,000 25,000 15,000 Supply and Demand Production and Absorption by Submarket, 2017 Producción (m2) Absorción (m2) Millions of USD $8,000 $6,000 $4,000 Free Trade Zone Exports, 2017 Services Food Industry Electric & Electronics Plastics Textile Precision and Medical Equipment Rubber Chemicals Metalmechanics Others Source: JLL CINDE 5,000 (5,000) Rohrmoser Escazu Este Heredia Santa Ana Cartago A closer look at the supply and demand picture reveals that market activity has been highly concentrated in a few submarkets. In all there were 59,000 m2 of new production this year, all of it contained within the submarkets of Escazu (Avenida Escazu and Escazu Village), Este (Asoban), and Heredia (Ultra, San Antonio, and America Free Zone). Demand for this year registered 99,000 m2 of net absorption, a record for San Jose. About two-thirds of demand this year happened in the Heredia submarket, as the abundance of new, quality buildings at affordable rents has attracted many large users. Absorption was driven by several large leases, such as Amazon, which has commited to nearly 40,000 m2 of space; Align Technologies who are leasing approximately 15,000 m2; and McKinsey, which has pre-leased nearly 15,000 m2. Much of the new demand is coming from companies who are growing out of older spaces. Currently in San Jose there is a higher vacancy rate for second-generation space than for firstgeneration space. The Santa Ana submarket is particularly hurt by vacancy generated by flight-to-quality, as evidenced by a high second-generation vacancy rate that is contributing to an $2,000 $ overall vacancy rate of 19%, by far the highest of any submarket. Vacancy has fallen and remains relatively low in the other submarkets 10% in Escazu, 9% in Rohrmoser, 8% in Heredia, and 6% in Este. Costa Rica s real estate market is driven by a strong export sector that specializes in the development of components used in medical devices, technological devices, and other high-value-added products, mainly for final consumption in the United States. Previously the largest export sector was electronics and electronic components, however as evidenced by the closure of the Intel factory in 2014 many of these jobs have moved to Asia. Recent demand has been driven by the fast-growing medical equipment and services (i.e. BPO) sectors, which combined for over $6 billion in revenue in Companies contributing to the recent spike in demand, such as McKinsey, Amazon, Microsoft, Align, MSD, Thermofisher, and Bayer, belong to these sectors. In all, companies operating out of Costa Rica s Free Trade Zones registered sales of $7.2 billion in Vacancy by Type Stock by Submarket, Current and Projected 30% 1,400,000 25% 20% 15% 10% 1st Generation, % 2nd Generation, % Total, % Rentable Area (m2) 1,200,000 1,000, , , ,000 Cartago Este Rohrmoser Santa Ana Escazu 5% 200,000 Heredia 0% Rohrmoser Escazu Este Heredia Santa Ana Cartago 0 Stock EY 2017 Forecasted Stock EY 2020

6 6 Office Market Report San Jose, Costa Rica 2017 Rents As rents move in the opposite direction as vacancy, it is logical that rents seemed to have hit bottom in 2016, the same time that vacancy hit its peak of 17%. The market seems to be adjusting, with vacancy now on its way down, and asking rents now on the rise. A limited supply pipeline and strong demand suggest that rents should continue to rise over the medium term, moving the market into a landlordfavorable context. The most expensive submarket in San Jose continues to be Escazu, where landlords are asking between $22-25/m2/month for Class A offices and between $17-23/m2/month for AB. The rest of the submarkets are generally in line with each other in terms of asking rents, with Class A between $17-21/m2/month and Class AB between $14-21/m2/month. Between 2013 and 2016, Class A rents in San Jose seemed to be converging, as top properties in the market began to compete aggressively on base rent while offering other concessions such as first right of refusal and tenant improvement allowance. This year Class A rents rose at a higher rate than AB, indicating that landlords are again feeling more empowered, and they are asking more for better quality buildings. USD/m2/month The ability of landlords in San Jose to be flexible and adjust to market fluctuations shows that, even though the market is small, it is sophisticated. Most properties are owned by real estate funds or developers who manage their portfolio based on market intelligence and risk aversion. As the economy seems to be recovering, these landlords should be rewarded. $24 $22 $20 $18 $16 $14 $12 $10 Class A Class AB Historical Rents by Class Forecast Historic Rents by Submarket Average Asking Rent, USD/m2/month $25 $24 $23 $22 $21 $20 $19 $18 $17 $16 $15 Forecast Rohrmoser Escazu Este Heredia Santa Ana Cartago Total Market Source: JLL Research

7 7 Office Market Report San Jose, Costa Rica 2017 Typical Market Practices Standard Unit of Measurement Unit of Measurement Square Meters (m 2 ) Lease Contracts Rent Quoted in USD /m² /month Typical Lease Term 3-5 years Frequency of Rent Payment Monthly Deposit / Lease Guarantee Case-by-case, insurance policy covering the contract is typical 1 to 6 months. Security of Tenure Only for the duration of the tenancy. No guarantee beyond the original lease term. Statutory Right to Renew No (unless an option to renew is agreed at the outset and specified in the lease) Basis of Rent Increases or Rent Case-by-case basis, CPI Review (Typically indexed as a percentage of local CPI, but this can vary) from 3 to 5%. Frequency of Rent Increases or Rent Review Agency Fees Agency Fees (payable by Landlord / Tenant) Legal Fees (payable by Landlord / Tenant) Depends on contract, but usually annual Transaction Fees 1-3 month s rent, or 3-5% of sale Incentives Landlord / Tenant Each part responsible for its own legal costs Rent Free Period Usually only the time for the build out, 2 months The rent free period is not standardized in the local market, however typically occurs. The length of this period is negotiated between the parties and is also a factor of how much (if any) tenant improvement allowance is provided. Local Property Taxes Building Insurance VAT / GST Payable on Rent & Service Charge (Payable by Tenant) Taxes Landlord Landlord N/A on leases No Service Charges, Repairs and Insurance Service Charges/Managements Fees Utilities (Sometimes separately metered, sometimes paid as a percentage of occupation) Car Parking Internal (Tenant Space) Common Areas (reception, lift, stairs, etc.) External / Structural Sub-Letting & Assignment Early Termination Tenant's Building Reinstatement Responsibilities at Lease End Land Title Foreign Ownership Strata Title (Partial ownership of the building) Security Deposit Agency Fees Additional to the rental charge and payable monthly in advance Electricity, telephone, AC, etc. paid by tenant according to consumption 1 space per m 2 area leased Tenant Landlord (charged back via service charge) Landlord Disposal of Leases Normally yes (subject to landlord approval) Legally tenants can exit after the first year without penalty. To avoid this LL can demand fully bondable lease agreements. Purchasing Properties Legal Fees 50% Stamp Duty Other Transaction Costs Original condition allowing for normal wear and tear Mainly freehold No restrictions Strata title ownership is typical Case-by-case 5% of the sale paid by the seller. See below Typically paid 50% each Source: JLL Research

8 8 Office Market Report San Jose, Costa Rica 2017 Want more? Managing Director North Latin America Associate Director North Latin America Zach Cheney zach.cheney@am.jll.com Scott Figler Scott.Figler@am.jll.com About JLL About JLL Research JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. A Fortune 500 company, JLL helps real estate owners, occupiers and investors achieve their business ambitions. In 2016, JLL had revenue of $6.8 billion and fee revenue of $5.8 billion and, on behalf of clients, managed 4.4 billion square feet, or 409 million square meters, and completed sales acquisitions and finance transactions of approximately $145 billion. At the end of the second quarter of 2017, JLL had nearly 300 corporate offices, operations in over 80 countries and a global workforce of nearly 80,000. As of June 30, 2017, LaSalle Investment Management had $57.6 billion of real estate under asset management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit JLL s research team delivers intelligence, analysis and insight through market-leading reports and services that illuminate today s commercial real estate dynamics and identify tomorrow s challenges and opportunities. Our more than 400 global research professionals track and analyze economic and property trends and forecast future conditions in over 60 countries, producing unrivalled local and global perspectives. Our research and expertise, fueled by real-time information and innovative thinking around the world, creates a competitive advantage for our clients and drives successful strategies and optimal real estate decisions.