A change in the Spanish office market paradigm?

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Over the last 20 years, the operating pattern of the main office markets in Spain, focused on Madrid and Barcelona, ​​has been characterized by a greater impact of the market cycles in the capital city. In line with this, during an expansive moment, Madrid has always experienced the best improvements market fundamentals, in both absolute terms and relative terms and, consequently, has suffered greater adjustments in recessive phases. However, during the start of the new expansionary cycle we are experiencing, it is Barcelona that is recovering faster at the moment.

There are several factors that can explain this situation, which we will try to synthesize even at the risk of oversimplifying an analysis that would undoubtedly require further study. Even so, this overview on the main indicators of how the sector behaves in the two cities and why, should serve as a starting point.

From the outset we can focus on the evolution of demand in Barcelona, which exceeds that of Madrid by 20%. We note that the difference in contracted square meters between both markets, which as of today is below 15%, has narrowed down greatly when compared to a difference of more than 100% in pre-crisis years. We also point out the greater relative weight of the letting activity compared to the size of the market, of around 5.4% of the stock in Barcelona, ​​against 3.4% in Madrid. A reason for the greater demand in the Ciudad Condal is the amount of contracted floor area for newly created business activities. The data indicates that 20% of the contracted area in Barcelona corresponds to this concept, while in Madrid it falls below 10%. The consolidation of Barcelona as a technology hub (TMT), as a startup development ecosystem and as a destination for Shared Service Centers for large multinationals is a part of this explanation. Madrid, on the other hand, continues to rely on the continued growth of the services and financial sector.

Having said this, for this analysis it is important to bear in mind the reaction of supply, as both markets show a low availability rate but, especially in Barcelona, these figures comprise single digits. The data becomes more remarkable when only looking at quality office buildings, in which case the availability falls below 6% in both markets, a figure generally accepted as a sign of lack of new product in the market.

On this basis, one can observe how the supply has reacted differently in both cities. In Madrid, the rapid reaction in refurbishment and quality improvement of buildings in the business district by their owners has allowed them to meet the demand for CBD office space over the last two years. It was not until recently that development projects for new office buildings began, including areas outside the M30. In general, the office market in the capital is developed in tune with the demand.

In contrast, there are hardly any new projects under construction in Barcelona, which in addition to the loss of part of the stock for the convenience of the change in use to hotel or residential, has aggravated the availability rate and provoked a greater imbalance with demand. New development activity only began to be apparent during the present year. It is expected that the pace of construction of new quality buildings in the next two years will be aligned with the needs of the demand in both markets, so in general there is no provision for oversupply in any of them. In this sense, it is important that Barcelona reacts promptly to the generation of new spaces, capable of satisfying ever more demanding clients in terms of spaces, locations and technological benefits while being able to relocate the stock that does not meet those standards to other uses. When analyzing rents in both markets, we see an unequal behavior resulting from the combination of a different evolution of supply and demand in each market and, naturally, the size of each market. For this last one, it should be taken into account that Madrid is more than twice as big compared to Barcelona

This behavior is reflected in the faster recovery of rental levels in Barcelona, ​​whose prime rents have already recovered 81% of what was lost during the crisis in all markets, including the periphery. An increase that also reflects the high foreign investment appetite that, having overcome the uncertainties of the crisis, has returned to venture in the city’s office market.

With regard to Madrid, prime rents have recovered by 77%, concentrated mainly within the limits of the M30, a significantly more moderate recovery. For all these reasons, it is possible to predict that although Barcelona is taking better advantage of the new cycle to recover market fundamentals, the greater pace of demand growth places the capital close to its annual recruitment potential for the coming years; and evolution of incomes will depend fundamentally on the speed of reaction of supply, which is, today, the big question for professionals in the sector.

In this case, a demand growth greater than 25% can be expected in Madrid in the next three years, which will lead to a higher increase in revenues in CBD that will be extended beyond the M-30.