Oct 10 2013
Office vacancies in Santiago probably will climb to 11 per cent in 2014 from a projected 6.6 per cent at the end of this year as the flood of newly built space becomes available for rent
The retail magnate’s 62-floor Torre Gran Santiago in the city’s financial hub is part of a record amount of office space about to flood the market. Santiago developers, in an effort to fill the new buildings, are sweetening terms for tenants with such perks as six months of free rent, double the norm, or by helping pay for improvements that usually are the responsibility of occupants, according to brokerage CBRE Group (CBG).
“The winners will be those that react first and offer incentives to lock in renters,” Marc Royer, director of the capital markets division in Santiago for CBRE, said in an interview. “Some companies are starting to defer their decisions to rent new offices, to see if they can negotiate better terms.”
Office vacancies in the Chilean capital probably will climb to 11 per cent in 2014 from a projected 6.6 per cent at the end of this year as the flood of newly built space becomes available for rent, according to CBRE. Just two years ago, the vacancy rate was less than 2 per cent following a dearth of construction.
About 850,000 sqm (9.15 million sq ft) of new space is slated to come to market in the next two years, boosting the city’s office supply by almost a fourth, the brokerage said.
The upscale areas of El Golf, Vitacura and Nueva Las Condes may fare the best as purchases of top-tier, or Class A, office buildings by insurance companies and investment funds, along with postponed construction plans by some developers, stave off rent declines, according to CBRE.
Office landlords in Providencia and downtown Santiago may be less lucky as tenants vacate older offices and move into new developments. In those municipalities, where most new projects are lower-quality Class B buildings, occupancies and rents may fall, said Augusto Rodriguez, who manages about $1 billion of real estate investment assets for Grupo BTG Pactual in Chile.
“The effect will be felt much harder in the B-level office market, where vacancy rates could shoot up to 15 per cent,” he said in a telephone interview from his El Golf office. “If there’s an adjustment in rent prices, it will be in the B level, not in the A-level buildings.”
Office buildings that are considered A grade have, among other features, open floor plans of at least 400 sqm and ceilings at least 2.5 metres (8.2 ft) high, and are less than 25 years old, according to Colliers International. Class B buildings have open plans of at least 150 sqm and 2.3-metre ceilings, and are less than 40 years old.
“Those in Providencia, they are the ones in trouble,” said Alejandro Fernandez, a broker at Santiago-based real estate brokerage P&G Larrain.
Fernandez is in charge of renting out the 44,822-sqm, 22-floor Genesis office building project in the neighbouring Las Condes district. The top-tier development, which has yet to move beyond the digging of its foundation, has already found tenants for more than 60 per cent of its space.
“I’ve noticed some more people approaching and asking about discounts, but I’m turning them away,” Fernandez said.
This year, a record 18 new top-tier office buildings are scheduled to come to market in Santiago, a city of 7 million, according to Contract Workplaces, an office-space refurbishment and consulting firm. That’s up from 10 last year and five in 2011. Before that, the average was three annually, prior to the surge in development driven by economic growth.
“At a first glance, it may seem too much,” Victor Feingold, regional director at Contract Workplaces, said in an interview at his Santiago office. “But in a healthy economy like Chile’s, you see a migration related to the quality of the buildings. The bigger companies fill in the space of the new premium buildings, because of the status they gain, and the space they leave usually gets filled up by smaller service firms or the companies that couldn’t afford them before.”
Paulmann, the chairman of retail giant Cencosud, Latin America’s third-biggest retailer by sales, suspended construction of his Costanera Center project for most of 2009, after the financial crisis the previous year plunged Chile’s economy into a 1.1 per cent contraction. Construction resumed as growth returned to more than 5.5 per cent a year, propelled by strong consumer demand and rising copper prices.
Gross domestic product expansion in Latin America’s wealthiest country is likely to slow to between 4 per cent and 5 per cent next year, according to Chile’s central bank. Growth may be as little as 3.5 per cent, estimates Vittorio Corbo, senior investigator at Santiago-based think-tank Centro de Estudios Publicos and a former head of the bank.
Aside from the 300-metre octagonal Torre Gran Santiago tower, Costanera Center also has a 200,000-sqm shopping mall and three smaller office buildings. The project is coming online in stages — the mall opened in June 2012 — while development of the 73,500-sqm skyscraper and an adjacent 17,000-sqm office building continues. Construction of two additional 32-floor buildings, which will include a five-star hotel, is planned for future stages.