(An excerpt from a Valor Economico article written by Chiara Quintao)

With a high volume of new office buildings coming to market, and companies being more careful in choosing to rent new space, the commercial-property market of São Paulo, Brazil’s financial and business center, already shows an increase in vacancy and prices interrupting their rising trend of the past two and a half years. In 2013, such trend is expected to intensify, with expectations that prices may even fall.

In 2012, multinational companies were more cautious when taking the decision to rent new areas, especially because of the global crisis. Sandra Ralston, vice president of Colliers in Brazil, estimates that multinational companies account for 80% of the occupation of big office buildings in São Paulo.

GDP growth below expectations also contributed to the slowdown in office-rental business. “The year 2012 was not bad, but it didn’t perform according to expectations we had in June,” Ms. Ralston says.

In the second half of 2012, average rental prices were stable, and building owners started to be flexible in negotiations, says André Costa, rental chief at Jones Lang LaSalle. That included grace periods given to new occupants while they invest in the rented space to adjust them to their needs.

Another change last year was that pre-rentals — signing contracts before developments are concluded — stopped being common practice, even in properties of hot regions in São Paulo, such as the Faria Lima Avenue, a financial hub that’s the most in-demand commercial space in Brazil’s real-estate market. In this scenario, Mr. Costa says, speculation on rental prices diminished.

“Prices tend to decline in 2013, because of the amount of new buildings being offered,” Mr. Costa says. He estimates vacancy in São Paulo — including Alphaville, an affluent neighborhood in Barueri, in the metro area — at around 15% at the end of 2012, which Jones Lang considers equilibrium level.

For 2013, Jones Lang projects vacancy at 18%, meaning new offerings will top demand. “Owners who want to rent properties quickly will have to be flexible regarding prices,” Mr. Costa says. Ms. Ralston, with Colliers, says she expects prices to be stable on the market average in 2013, with declines in some regions of São Paulo. Colliers estimates the vacancy rate at the end of 2012 in 9% to 10%, close to what it considers to be the market’s equilibrium level.

Jones Lang says annual projected growth of corporate-office space inventory in São Paulo is 15.3% from 2012 to 2014. From 1996 to 2011, annual expansion was 8.8%. In the first quarter, part of the rental deals that were not concluded in 2012 are likely to happen, Ms. Ralston says. As for new deals, it will depend on conditions of the Brazilian and global economies.

Cushman & Wakefield projects the new inventory of class-A corporate-office space in São Paulo to be 486,000 square meters this year. But Mariana Hanania, Cushman’s market research manager for South America, says the volume may reach 500,000 or 600,000 m2, depending on the share of new inventory that was planned for 2012’s fourth quarter that was postponed to 2013.

Ms. Hanania says rental prices will continue to rise, due to the high quality of buildings that are being delivered, though the rise may be modest. “But some owners may be more flexible, granting discounts to close a deal,” she says.

As for existing leases, industry company representatives say it is possible to raise prices of those that are below current market values. In offices, contracts are adjusted when they expire, meaning after five years, or in revisions every three years.

“Renewals and revisions will bring contracts to market values, but I don’t see prices rising above the current level,” says Dani Ajbeszyc, finance and investor-relations chief at Cyrela Commercial Properties. He says that due to the large supply of new developments and the economic slowdown, CCP’s vacancy — currently zero — may “rise a little.”

Early in December, Felipe Góes, CEO of São Carlos Empreendimentos, said in a meeting with investors and analysts that there is room in the next couple of years to raise the company’s rental prices above inflation. Mr. Góes said that is possible because São Carlos’s portfolio have rental prices about 30% below market values, based on levels on September 30th.

Source: Valor Economico

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