16 March 2015 – El Confidencial
In Madrid, the ‘City’ is called Azca. It is the capital’s financial centre par excellence and, yet, a third of the office space in the area is empty. (According to sector experts), the time for change in upon us.
In Madrid, the ‘City’ is called Azca. It is the capital’s financial centre par excellence, home to iconic buildings such as Torre Picasso and many of the world’s leading companies own the properties, including Pontegadea (the real estate company owned by Amancio Ortega), GMP, Mutua Madrileña, El Corte Inglés, Metrovacesa, Testa and Infinorsa. The prime location, in the heart of the Paseo de la Castellana and next to one of the capital’s major transport hubs, Nuevos Ministerios, meant that until a few years ago, this area accounted for the majority of the capital’s prime office space. However, the opening of the Cuatro Torres, the arrival of the economic crisis, the departure of large companies to peripheral areas (of the city) and the lack of investment, both in the properties themselves as well as in the surrounding area, have dampened Azca’s appeal.
The combination of these elements has also had a significant affect on prices. Between 2008 and 2014, prime rents in the capital fell from €39/m2 to €25/m2 (per month), whilst in Barcelona, rents decreased from €22/m2 to almost €14/m2 (per month), according to a report called “Understanding the Office Market in 2014”, prepared by Deloitte Real Estate. The final nail in the coffin in terms of the pressure on the area came with the departure of KPMG, which (last month) decided to leave its headquarters in Torre Europa to move to the Torre de Cristal, at Real Madrid’s former Sports City (Ciudad Deportiva).
Furthermore, BBVA is set to leave its traditional black skyscraper to relocate to the suburb of Las Tablas, and the tenants of the Torre Saint Gobain and Torre Titania are planning to fully vacate; the latter was built by El Corte Inglés on the foundations of the former Windsor. In total, around 67,000 square metres of the 272,000 square metres of above-ground office space in the area is (currently) available to let, which gives rise to the question: is Azca doomed to reduce its prices further?
The answer is no, according to all of the experts, although they admit that the area is at a turning point. In their view, Azca is living through its own catharsis, which may be summarised by the classic phrase – adapt or die. And the widespread belief is that the former will happen. “Right now, Azca has an opportunity to reinvent itself as the ‘City’ of Madrid once more, but it must know how to seize it. In terms of its location, it has the right ingredients and moreover, the higher the vacancy rate, the easier it will be”, say the experts at Deloitte.
In Madrid, barely 2% of the office space in the high quality buildings inside the M-30 is vacant.
In this sense, a public-private initiative, known as the Azca Master Plan (Plan Director de Azca), is underway, which seeks to open up the area and facilitate access from El Coste Inglés in Nuevos Ministerios to the Bernabeu, through three targeted efforts: construction work to improve (the area in general), environmental initiatives and planning. This would mean, amongst other aspects, modifying some of the uses (of the area); the main challenge is to convert the area that is the capital’s business district during the week, into an area for families, shopping and leisure on the weekends, rather than leaving it half empty when the office lights are turned off (on Friday night), which is what happens at the moment.
“Azca must become a digital icon that adapts to incorporate technological developments, that uses the facades of the buildings (creatively), that puts up digital screens to attract young people (to the area) at the weekend, that organises initiatives for the neighbours (of the area) and the wider city, that becomes an icon of ‘digital Madrid’, in the style of New York’s Times Square”, says Ángel Serrano, Business Director at Aguirre Newman.
His company is managing the last major transaction in the area, the sale of Castellana, 89, in which a great deal of interest is being shown; the price may reach €140 million. The same interest was seen recently in the bid to acquire the Torre Saint Gobain, which GMP ended up purchasing for €90 million (with plans to spend a further €14 million on its refurbishment) and the land that El Corte Inglés purchased from Adif for €136 million, when the starting price was €40 million.
These transactions confirm the conviction that the major landlords in Madrid have that Azca is going to emerge stronger from the current situation, which means it will be able to increase its prices again in the medium term. Nevertheless, for the time being, it will have to endure a couple of years “crossing the desert”, during which time GMP, Infinorsa and whoever ends up winning the bid to acquire Castellana 89 will refurbish their buildings as well as the Torre BBVA (where the bank will continue to occupy the top five floors and display its logo on the outside), Torre Saint Gobain and, most likely, the Torre Europa.
It is expected that all of these construction works will be carried out in parallel to the aforementioned Master Plan to relaunch the area, which means that now is the perfect time (for tenants) to move to Azca before all of these improvements have been completed and prices increase. “We are currently experiencing a historic moment in terms of low prices, which provides the perfect opportunity for many of the companies that moved out of the centre and now want to move back. Moreover, this is supported by the gradual recovery of the economy and the privileged location of Azca, which I think will play an important role in its favour (in the future)”, says José Luis Guillermo, managing partner of Inmospace. Nevertheless, in his opinion, this metamorphism of the area will require support from the Public Administrations, not only in terms of the necessary changes to certain uses (of the area), but also in terms of the adoption of measures to promote the entry of multi-national companies into the capital’s ‘City’.
Experts consider that now is the time to move to Azca, before prices rise.
Madrid has some of the highest forecasts for (rental) income growth over the next five years of any city in Europe. Currently, according to data from Knight Frank, its vacancy rate amounts to 11.9%, although in the central business district, known as in the jargon of the trade as CBD, the figure decreases to 7.3%, and for Grade A buildings (highest quality) within the M-30, the vacancy rate is a low as 2%. This means that there are very few good buildings (available) in prime areas in Madrid.
In this context, a third of the leaseable office area in Azca is currently vacant and, despite that, both the experts and the large investors that are bidding to purchase buildings expect average rental income in the area to return to €30/m2 (per month), i.e. 20% more than now, over the next five to seven years. How come?
Patricio Palomar, Director of Alternative Investments at CBRE provides a good summary of where Azca is going and the price of its rentals: “To analyse the evolution, three points should be taken into account: the Master Plan for the area, which will favour (higher) prices; how Azca is going to change in terms of immediate availability, since various buildings are currently being refurbished, which will work in the area’s favour, but that will also mean there is more supply and therefore, tenants will have greater bargaining power, which may contain the increase to some extent. The third element is that there are few square metres concentrated in one area in Madrid and there are few high quality buildings for tenants looking to rent more than 10,000 m2 of space inside the M-30; a supply that Azca will indeed have (in the not too distant future). Add to that the fact that many tenants of this type, which moved to peripheral areas in the past, now want to return to locations such as this one, make me think that we will see price increases”.
Original story: El Confidencial (by Ruth Ugalde)
Translation: Carmel Drake