On the verge of stability: New prime office buildings look to satisfy high demand

The prime office market is a segment to watch. Even after adding six new buildings with more than 51,000 sq metres to Lima in 2012, the initial vacancy rate for prime office space dropped to 2.2% in 3Q 2013, down from 2.4% in 3Q 2012. Such high demand has limited market options for leading companies doing business in Peru, but it is also laying the foundations for future buildings that will change the face of Lima.

Rentals

“There are virtually no products for prime office space on the market because it is all taken,” said Eric Rey de Castro, the general manager of Colliers International Peru, the local branch of the global real estate consultancy firm, told OBG. Only 9980 sq metres are available out of a total stock of 463,680 sq metres, distributed among 42 buildings, meaning the market, generally managed through rentals, has become dominated by landlords. “When a company finds a space, it basically has to pay what the landlord asks,” Rey de Castro told OBG. “This means Class B space can often rent for the price of Class A.” Despite the possible risks that could arise from a combination of fluctuating demand and landlords raising prices, prices have not generally skyrocketed, although they are climbing.

By the end of 3Q 2013 average prices for prime space stood at $22.65 per sq metre, up from $21.69 in 2012. Class A+ can reach up to $22.36 per sq metre. Prices have been growing annually by about $1-2 since 2010, before which rentals had remained stable at around $16 per sq metre since 2006. Compared to other capital cities in the region, these prices still remain very low. According to Colliers, São Paulo holds first place, with average prime rentals costing $88.81 per sq metre, followed by Bogotá and Mexico City with $34.32 and $26.25, respectively. Other large regional commercial centres like São Paulo and Santiago also outpriced Lima. For example, for sales, the average price in the Peruvian capital was $2053 per sq metre in the third quarter of 2013, compared to $2443 in 2012.

Development

With the current market tight, high demand has prompted the construction of many new buildings that will boost supply significantly within the next couple of years. According to Colliers’ Q3 2013 report on office space, 53 buildings in the A+, A and B+ classes are on the drawing board or in the construction phase, representing around 800,000 sq metres of additional office space that will be delivered by the end of 2016. Colliers forecasts that this development will balance out the market, bringing vacancy to a reasonable 8-10%, while maintaining relatively stable prices. “With the increase of supply we believe prices are not going to rise much further,” Rey de Castro told OBG. “Once we reach vacancy levels higher than 5%, we will have more control over prices and be able to differentiate the class of offices along clearer lines.”

“Sanhattan”, the unofficial name of a financially dense part of the San Isidro district, will be home to around one-third of the 820,000 sq metres of new prime office space expected to be delivered between 2014 and 2017. Recent additions in the area include Fibra W/B, which will add 11,000 sq metres over 13 different floors, and the Torre Begonias, which will offer 26,000 sq metres over 26 storeys and measure 120 metres in height, making it one of the country’s tallest buildings. Developed by local group Fondo de Inversion en Bienes Raíces, Fibra W/B will be the firm’s second green project but the first with Leadership in Energy and Environmental Design certification. The Torre Begonias is also environmentally certified, and in general, office buildings are leading environmentally conscious construction trends in Peru.

Opportunities

Though the market is dominated by rentals, many individual Peruvian investors have begun buy-to-let practices within the segment, due mainly to assured returns, which Colliers places at around 11%. However, according to Rey de Castro, some local firms are also beginning to buy as final users, a positive sign which should translate into long-term financing, he said. With indicators suggesting a market on the verge of stabilising what has been erratic demand, foreign investment is very likely to follow in the near term.