Savills World Research Offices Spain Market in Minutes Offices Madrid Q1 218 GRAPH 1 Annual Take-up GRAPH 2 Prime Yields vs Spanish Bond Yields 1,, Q1 Q2 Q3 Q4 8% CBD Outside M-3 Spanish Bond Yields (1 years) 8, 7% 6% 6, 5% sq m 4, 2, 4% 3% 2% 212 218 1% Q1 2 Q1 3 Q1 4 Q1 5 Q1 6 Q1 7 Q1 8 Q1 9 Q1 1 Q1 11 Q1 12 Q1 13 Q1 14 Q1 15 Q1 16 Q1 17 / INE SUMMARY The incorporation of new and refurbished spaces will boost demand Quarterly take-up in the region of 127, sq m recorded a 4% y-o-y increase. However, it should be noted that one transaction accounted for almost 2 of the total. Occupier demand continues to show interest within the M-3 ring road, and represents 54% of the contracts signed between January and March. Transactions below 5 sq m, the most common surface area range in the sector, returned to the market with renewed strength. Approximately 6 of the occupiers let small spaces, mainly in the urban area. The vacancy rate returned to 1. It grew a few percentage points with respect to the previous quarter due to the reincorporation of spaces vacated by the previous tenants, as well as new developments completing. By the end of the year, the incorporation of 95, sq m of new office developments is anticipated, which will place the size of the office stock at 13.2 million sq m. Closing rents continue to rise and the number of letting agreements in the highest rent range have also increased, whilst the lowest rent range has diminished. All the rents in recent years of > 3 per sq m/month were carried out in new and refurbished buildings. Asset quality is now a key factor in the search for office units. Close to 32m were transacted in Madrid in the first quarter, representing 9 of the national total and a 14% drop compared to Q1 218. Delivery of new product for sale will definitely bolster the market recovery. savills-aguirrenewman.es/research 1
Market in Minutes Offices Madrid GRAPH 3 Economic Indicators Economic Overview The economy maintains its growth rate. The estimated GDP figure of Q1 218 places the annual growth at 2.9%, thus initiating the moderate slowdown announced last year, with the prospect of ending the year at 2.7% (according to Focus Economics). The jobs market, on the other hand, continues to show signs of recovery. The number of people registered with Social Security at the end of March already exceeded 18.5 million workers, almost 4% higher than the same month of. Additionally, this is the highest record figure of the last decade. The Q1 Spanish EPA registered a slight increase compared to the previous quarter (two percentage points), placing the unemployment rate at 16.74%. This increase is attributable to the end of the winter season (Christmas and January sales). In 218, Holy Week, held in March, also contributed to this figure. Nevertheless, year-end forecasts maintain the downward trend that began in, with 222 figures set to fall at 12% (according to Focus Economics of April 218). The Business Confidence Index for Q2 218 has also progressed positively, standing at 135.5. It has increased both in q-o-q and y-o-y comparisons, but above all highlights the expectations of the business sector over the coming quarter. There has been an increase in the percentage of managers with a favourable opinion on the progress of their business, whilst the percentage of managers with an unfavourable view has decreased, leaving the balance of expectations at 1.7 points, the highest recorded in the historical series. Take-up and Demand After two consecutive years without mega deals ( 1, sq m) until the fourth quarter, 218 started with one of the largest transactions in GRAPH 4 Take-up by Market Zones 9 8 7 6 5 4 3 2 1 the historical series. The just over 27, sq m deal signed by Everis in Manoteras ranks eighth in the top ten of the Madrid occupier market (since ). Additionally, it was also the first deal of >2, sq m since. The quarterly volume in take-up in office buildings (exclusive and semi-industrial) stood at circa 127, sq m, maintaining the take-up level of the previous year (only 4% higher), the only difference being that one transaction accounted for 2 of the total. In terms of the number of deals, the y-o-y comparison remains Prime CBD Urban Area Inner Periphery Outer Periphery 1 TABLE 1 Main Deals - Occupier Market Q1 218 212 6% GDP CPI Unemployment Rate (right axis) 3 Tenant Zone Floor Area(sq m) Activity Sector Annual Growth 4% 2% -2% -4% -6% 25% 2 15% 1 5% Everis North 27,3 IT Viajes Barceló Northeast 9,3 Business Services Allfunds Bank North 6, Bank-Finances Spaces CBD 5,15 Business Services We Work Urban Area 3,65 Business Services -8% Q1 3 Q1 4 Q1 5 Q1 6 Q1 7 Q1 8 Q1 9 Q1 1 Q1 11 Q1 12 Q1 13 Q1 14 Q1 15 Q1 16 Q1 17 Andersen Tax Legal Urban Area 3, Business Services Source: INE 2
Q1 218 negative (-19%). This considerably increased the calculation of the average area taken (+28% compared to Q1 ). Specific analysis of the transaction performance of <1, sq m in terms of average surface area let would show a stable situation. The 755 sq m transacted in Q1 218 exceeded the y-o-y figure by only 1%. Activity by Market Zones Demand preference for the city centre is evident. Between January and March, 54% of the number of deals took place within the M-3, although it represented a discrete GRAPH 5 Nº of Deals by Surface Range 1 9 8 7 6 5 4 3 2 1 TABLE 2 Future Supply 218-219 percentage in take-up (37% compared to 63% accumulated both close to, and far from, the periphery). The Everis transaction in Manoteras had a strong impact on the first tier of the periphery, which in Q1 218 accounted for 48% of the total quarter, whilst it only represented 35% in the historical series. Deal Size Transactions of <5 sq m, the drivers of the Madrid office market (accounting for 54% of the deals recorded since ), returned to the market with renewed strength during the first three months of the year, representing almost 6 of the SS ( 499 sq m) MS (5 sq m - 999 sq m) LS ( 1, sq m) Asset Zone Floor Area (sq m) Type of work OM Infinito East 4, New Development Helios Northeast 34, New Development Madrid Río Urban Area 26,8 New Development A-2 Plaza A-2 24, New Development Puerto de Somport North 23, New Development Albacete, 5 East 18, Refurbishment Project 212 total. The geographical distribution of deals of this surface area range, clearly shows the preference of occupier demand for urban areas, with 62% of the total within the M-3 ring road, 63% of which were distributed among the submarkets in these areas. North of the nearby periphery tier and the A-6 axis on the far periphery (both outside the M-3) were the main destination of the <5 sq m deals, concentrated mainly in Pinar de Chamartín and Paus in the northern zone, and in Pozuelo de Alarcón on the A-6. Activity Sector For the first time since the beginning of the s, the technology and telecommunications sector has exceeded 3 of the take-up thanks to the Everis mega deal. If we were to disregard this deal from the study, the professional service sector would continue to lead office market activity in the capital. Several co-working companies are still in the expansion phase of the business, incorporating new locations into their networks. Spaces and We Work have recorded the two largest deals within the M-3, in the submarkets of Cuzco and Chamberí respectively. Current Vacancy The vacancy rate has returned to 1. This is a moderate increase (barely seven percentage points) driven by the reincorporation of large spaces vacated by the previous tenants, as well as the entry into the market of new development spaces. The prime area, with a vacancy rate below 4%, continues to suffer from lack of supply, and occupiers are directing their searches towards the CBD and urban areas, where they can find quality spaces thanks to the refurbished and updated offices. The vacancy rate outside the M-3 ring road stands at 12%, although there are notable differences among submarkets (some are at similar levels to prime areas). savills-aguirrenewman.es/research 3
Market in Minutes Offices Madrid Future Supply By the end of the year, the entry of 95, sq m of new office developments is expected, which will place the stock volume close to 13.2 million sq m. Refurbishment projects continue to be present in the market and the occupier demand is fully confident that the refurbishments will be of quality. In fact, all pre-let spaces are committed to these refurbished assets. In terms of future supply (new and refurbished product on the market), close to 12, sq m are largely concentrated in the northeast quadrant of the periphery (75%). Only 25% is located in the city centre (CBD and urban area). Rents The weighted average closing rent recorded in office buildings remained stable compared to the same quarter of the previous year, in the region of 16 per sq m/ month. However, the comparison with the previous quarter showed a slight decline of 3%, due to the impact of the 27, sq m signed by Everis, which, despite having registered the highest rent in its immediate surrounding area, is in the middle range in the overall market. The distribution of closing rents according to range increased slightly in the 25 per sq m/ month range (two percentage points compared to, 16% versus 14%). The percentage of agreements however fell at < 15 per sq m/month (5 in Q1 218 and 56% in ). The most significant growth took place in the range of 2-24.99 per sq m/ month, which increased six points, from 11% to 16%. In recent years, the highest rental values (all > 3 per sq m/ month) were registered in new and refurbished properties. Asset quality is already a key factor in the search for office units, not only in the Castellana axis and its surrounding area, but also in the fact that the difference in closing rents according to the condition of the properties affects the entire market. Achievable rents are growing in all monitored zones. the prime CBD rent stands already at 31.5 per sq m/month, 1.5% above the level recorded in Q1 and 25% below the market peak. Nonetheless, it remains at the tail end of the European market. On the other hand, prime rent outside the M-3 is advancing more discreetly, posting up to 16.25 per sq m/month, only 5% y-o-y, and maintains the same figure as in the previous quarter. GRAPH 6 Rents and Vacancy Rate /sq m/month 5 45 4 35 3 25 2 15 1 5 TABLE 3 Main Deals - Investment Market Q1 218 Address Zone Purchaser Vendor Avda. Partenón, 4-6 Northeast Inmobiliaria Colonial Lar España Real Estate Socimi Titán, 8 Urban Area UBS Caja Duero Madrid Río Urban Area AEW Insur Vía de los Poblados, 7 Northeast Signal Capital Duro Felguera Jacinto Benavente, 4 A-6 Signal Capital Duro Felguera Pza Independencia, 2 CBD Inversor Privado Investment Market The total volume of almost 365m whiche was recorded in the office investment market at national level, represents a drop of 55% y-o-y. What could initially be interpreted as an investment lull can in fact be attributed to the lack of product on the market, as occupier demand maintains its interest in entering Average Closing Rent * Prime CBD Rent Vacancy Rate (right axis) Catalana Occidente Valle de la Fuenfría, 3 North Saint Croix Bensell Misarierra Santa Engracia, 23-25 Urban Area New Winds Patron Capital / *Exclusive Office Buildings 212 16% 14% 12% 1 8% 6% 4% 2% 4
Q1 218 the market, and the fact that there are also new players intending to bring their business to Spain. The distribution of investment volume by location leaves Madrid as the main focus of attraction, accounting for almost 9 of the total. The y-o-y comparison in the capital has fallen to -14%. Although the difference is not as large as in the national total, the lack of product is reflected in the fact that 45% of the deals were completed on floors and modules. The distribution of the number of deals with respect to the M-3 shows a clear preference for urban areas, with 7 of the transacted volume. However, it must also be noted that almost all the deals pertaining to floors and modules have been transacted particularly within the M-3 ring road. In terms of the transaction volume, the distribution was more balanced (57% within the M-3 and 43% outside of it). This has had a direct impact on the average transaction volume. Outside of the M-3, the volume transacted remained stable compared to the average volume of ( 27m, barely 3% less), whilst within the M-3 the figure stood at almost 17m (-35% compared to ). If we were to disregard the modules and floors, the average volume would rise to 29m, representing a 12% y-o-y increase. International investors continue to be present in the market. During the first quarter, they accumulated close to 135m distributed over four assets, all of them located in consolidated sub-markets (both inside and outside the M-3) or in areas undergoing consolidation. The entry into the market of several open sales processes and the reactivation of others that had been suspended allows us to be optimistic about the end of the year. Nearly 2,8m have been identified as having the potential to be closed by the end of the year, almost 6 of which come from mega deals ( 1m). "The delivery of high quality office buildings will be a key factor in reactivating investor activity at a time of high demand, and in a climate of low interest rates" Pablo Pavía, Offices Investment Yields Yields remain stable as the lack of activity in the market makes it difficult to establish current levels. The prime CBD yield will remain at 3.75% and the decentralised prime (NBA) at 4.5. GRAPH 7 Gap Between Prime CBD Rents in Europe - 218 vs mill. 6 5 4 3 2 1-1 -2-3 5, 4,5 4, 3,5 3, 2,5 2, 1,5 1, 5 Berlin Stockholm Oslo Q1 Q2 Q3 Q4 Nº trasnacted assets Q1 (right axis) Dusseldorf GRAPH 8 Investment Volume by Quarter Munich Milan Vienna Hamburg / *excluding Ciudad Financiera / **excluding Torre Picasso Frankfurt Copenhagen * Amsterdam Lisbon Cologne Brussels 212** La-Defense Paris-CBD Barcelona London-City Manchester Warsaw 218 Madrid-(Castellana) London-WE 25 2 15 1 5 savills-aguirrenewman.es/research 5
Market in Minutes Offices Madrid OUTLOOK 218 The adjustment in economic growth will not affect job creation. Focus Economics maintains that the unemployment rate will continue to trend downwards until 222, which will have an impact on the increase in personnel and the take-up of office spaces. The incorporation of new and renovated spaces will be another factor that will boost demand, which positively values the quality of buildings and the upgrading of properties. This will lead to additional rent differential with respect to their immediate surrounding areas. Rents will continue to increase due to the scarcity of product in some submarkets at almost 1 occupancy and the marketing of new assets (new developments and comprehensive refurbishments). Options for new headquarters are based not only on a specific area, but also on buildings that meet certain criteria regardless of their location, although accessibility by public transport and availability of complementary services for corresponding business activity are always an added value. The entry of new product for investment and the reactivation of suspended sales processes will make the market more dynamic. In Madrid, close to 2,8m worth of office sales are forecast to close by the end of the year, placing the annual total in the region of 3,m, which would be double 's office investment total. The new product on the market will balance supply and demand in investment. However, it is anticipated that prime yield levels will remain stable given the anticipation of rental growth and the healthy signs of occupier demand. Savills Aguirre Newman Team For further information please contact: Pablo Pavía Offices Investment +34 91 31 1 16 pablo.pavia@savills-aguirrenewman.es Ana Zavala Offices Agency ana.zavala@savills-aguirrenewman.es Ángel Estebaranz Offices Agency angel.estebaranz@savills-aguirrenewman.es Gema de la Fuente Research gema.fuente@savills-aguirrenewman.es Pelayo Barroso Research pelayo.barroso@savills-aguirrenewman.es Savills plc Savills is a leading global real estate service provider listed on the London Stock Exchange. The company, established in 1855, has a rich heritage with unrivalled growth. It is a company that leads rather than follows, and now has over 6 offices and associates throughout the Americas, Europe, Asia Pacific, Africa and the Middle East. This bulletin is for general informative purposes only. Savills accepts no liability whatsover for any direct or consequential loss arising from its use. It is strictly copyright and reproduction of the whole or part of it in any form is prohibited without permission from Savills Research. Savills Commercial Ltd 6