A model market: High demand for prime office space pushes rentals

Prospects for investment in Lima’s prime office rental market are expected to continue to be positive for the next few years, with sector statistics and professional opinions both highlighting the segment’s potential. While rental rates remain lower than in most Latin American capitals, companies are scrambling to get a share of prime office space while bargains last, and future projections suggest further expansion in the market is on the horizon.

At the end of 2011 the unsatisfied demand for offices was between 50,000 and 70,000 sq metres. This is in light of the 2009 global financial crisis when many real estate projects were put on stand-by, generating little supply for the following two to three years. Two years prior to the crisis demand ranged from 90,000 to 100,000 sq metres. Yet according to Ricardo Cabrera, the managing director of estate agent CBRE Peru, supply did not respond quickly enough after the economic downturn.

RENTAL MARKET: Just a few years ago, the market for offices was dominated by buyers. However, with the introduction of new investments and foreign players the situation has turned around and renting has become the most important activity in the segment. “When buying does occur, the companies are usually Peruvian or medium-sized investors who want to buy to lease, which means that part of the sales market actually turns into rent as well,” Cabrera told OBG. The average sales price per sq metre of office property in Lima is $2000, while the average rental rate come in at just under $20 per sq metre.

Rental demand is so high that many buildings that have not even finished construction are already completely rented out. This means that when these buildings are eventually introduced onto the market they will not contribute to satisfying new demand since they will have no available space. Such is the case with the Capital El Derby building, which will be 100% occupied the day it opens. Consisting of 18,000 sq metres distributed over 22 floors, construction of the building in Santiago de Surco began in January 2012 and is expected to be finished in 2014.

Cabrera told OBG that this is a common sight in Lima’s real estate market for prime offices, where despite such high demand, prices still remain lower than the rest of South America’s capital cities. Rio de Janeiro holds the regional record with average office rental space costing $79 per sq metre while the closer capital of Santiago de Chile ranks more reasonably at $26 per sq metre, according to Colliers International. Lima’s average rental price per square metre still holds at $19.25, according to CBRE statistics. Offices in Peru tend to be rented in dollars, but with the depreciation of the dollar, many buildings are beginning to hit the market in local currency.

BACK OFFICE: According to Cabrera, when average rental prices reach $25 per sq metre many companies are expected to begin opening secondary, “backoffice” locations on the outskirts of the city. This allows major firms to accommodate a large number of employees in less expensive spaces while maintaining their “front offices” in prime districts.

Cabrera predicts that Callao will become an important area for this type of operation, with several projects are already under way. However, no studies have measured the extent of its potential. Other possibilities for back office sites include the eastern part of Lima, which has been practically unexplored thus far and, of course, the southern part of the capital, where many offices have already begun operations.

BUBBLE TROUBLE: With prices inflating so quickly, the question of creating a bubble has been voiced by some in the sector. However, this is not generally seen as a significant threat. Compared to other Latin American markets, Peru is not only low in prices but also in office stock. The office vacancy rate at the beginning of 2012 was only 0.33% of the total available inventory. While new buildings are being constructed, these will not meet new demand since many have already completely or mostly rented out their spaces.