Growth in Paris office rents has further to go - Capital Economics
European Commercial Property

Growth in Paris office rents has further to go

European Commercial Property Update
Written by Yasemin Engin
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Despite the softness in occupier activity, prime office rents in the French capital grew at a healthy pace in 2020. And with the labour market set to recover in the second half of this year and a tight supply picture, we think that Paris rental growth has further to go over the next two years.

  • Despite the softness in occupier activity, prime office rents in the French capital grew at a healthy pace in 2020. And with the labour market set to recover in the second half of this year and a tight supply picture, we think that Paris rental growth has further to go over the next two years.
  • The latest occupier activity data for Q4 confirmed that COVID-19 dealt a heavy blow to the Greater Paris office market. Indeed, take-up in 2020 was nearly 45% lower compared to 2019. (See Chart 1.) And the weakness in activity was broad-based across sub-markets, with transactions in the central Paris area halving on the year. Coupled with a rise in supply, vacancy rates across the capital edged up, even in the CBD.
  • Yet, in the face of weak occupier activity, rental values have been remarkably resilient. Paris prime office rents grew by nearly 4% last year, which was only a touch softer than 2019’s 6% y/y. And while there has been a rise in rental incentives, much of this has been concentrated outside the CBD, such as in La Défense, the Western Crescent and the Suburbs. Indeed, JLL note that incentives vary between 10-20% in central Paris to nearly 30% in a La Défense and the Western Crescent.
  • Looking ahead, we forecast Paris prime rents to grow by a cumulative 1.5% over the next two years, in contrast to the consensus forecast of a small fall. For one, with restrictions likely eased towards the end of Q2, the labour market is expected to recover this year, and this will bode well for occupier demand. And while the slow start to the French vaccine rollout risks a delay to the lifting of restrictions, we think that the pace of vaccinations will pick up as vaccine hesitancy wanes. (See our European Economics Update.)
  • Meanwhile, we don’t think that supply will be a major drag on prime rents. Admittedly, around 1.8m sqm of office supply is projected to be delivered in the coming two years in Greater Paris, amounting to over 3% of total stock. But this figure masks significant disparities among the sub-markets. Indeed, while central Paris accounts for around 25% of this year’s supply pipeline, its low vacancy rate means that is better placed to absorb this supply than other sub-markets. (See Chart 2.) What’s more, according to Cushman & Wakefield, around 75% of this new supply in central Paris is pre-let, which will limit the rise in vacancy.
  • The upshot is that we expect Paris prime office rents to continue to grow this year and next. And given that rental incentives are still relatively low in central Paris, we think that any weakness may be reflected in a rise in incentives rather than a fall in rents.
  • But we still think that the risks to our forecast are skewed to the downside, given the uncertainty surrounding the virus. Any delay in the vaccination effort and therefore easing of restrictions would drag on the labour market recovery and weigh more on rents.

Chart 1: Ile-de-France Office Take-Up (M Sqm)

Chart 2: Office Vacancy & Completions Pipeline
(% of Existing Stock)

Sources: CBRE, Capital Economics

Sources: Cushman & Wakefield, Capital Economics


Yasemin Engin, Property Economist, yasemin.engin@capitaleconomics.com