Is the future of the office confined to the central business district?

“Good location, high-quality services and workspaces, and a commitment to ESG are the pillars of the new office model. The resilience of the CBD makes it highly attractive to investors.”

Joint interview with Samy Bchir, Chief Investment Officer of Sienna Investment Managers’ Real Estate practice, and Mohamad Abouchalbak, CEO of SFO Capital Partners, a London-based global real estate investor and investment manager committed to delivering superior risk-adjusted returns.

Photo credits – Agence Martingale. All rights reserved.

The office real estate market is in a state of flux. How has demand changed?

Samy Bchir: The office market is in the process of reinventing itself, driven by changes in the way people work and the new expectations of tenants and investors since the pandemic. The impact of these changes is particularly strong in Paris and the Île-de-France region.

Many companies have begun to review their property strategy, and are increasingly optimising costs and reducing floor space, in line with the increase in remote working. This is leading them to prioritise flexibility and the intrinsic quality of buildings, and to choose more central locations. What’s more, the office has become a place for creativity, innovation and osmosis now more than ever. Finally, companies are no longer immune to the climate challenge.

As a result, there is a scarcity of Grade A office space available in the Central Business District (CBD), while at the same time the vacancy rate is at an all-time high in certain submarkets on the outskirts of the CBD. In our view, the new office model must therefore incorporate 3 essential elements: a good location, high-quality services and collaborative spaces, and a commitment to ESG.

What do you see as the key to the appeal of the Central Business District (CBD)?

Mohamad Abouchalbak : The key to the attractiveness of the CBD lies in its optimal accessibility, its pleasant environment, the diversity of cultural and commercial activities it offers, and the concentration of high value-added businesses. Together, these elements create a dynamic environment that encourages business growth, professional collaboration and employee well-being, making it even more attractive for recruiting and retaining talent.

On the investor side, the CBD is also very attractive, given the limited supply, high liquidity and proven resilience of this strategic market. For SFO Capital Partners, the CBD is a prime target, as rental demand is very strong and there is virtually no quality supply that meets the latest ESG standards. Our main strategy is therefore to refurbish older buildings with high potential, ideally located to create work and living spaces that meet the emerging needs of users, while minimising their carbon footprint.

In 2019, we completed the purchase, in partnership with Sienna IM, of the building situated 17, Avenue Hoche. The sale to a German pension fund came at a record price just two and a half years after the acquisition, following an extensive redevelopment program of the building, which has achieved BREEAM Good and BBC Rénovation energy certifications.

Is the trend the same in other European cities?

Samy Bchir : Over the last three years, from Madrid to London, companies have had to contend with the reluctance of some employees to return to the office. This phenomenon has become more pronounced in decentralised sub-markets and in cities with a low diversity of office users and low residential density. Cities such as Munich, Paris and Amsterdam have twice the rate of return to the office compared to Frankfurt or London. Against this backdrop, we favour cities with a high level of diversity and a diversified economic fabric, while remaining uncompromising about locations.

How can user demand be met within the constraints of Paris?

Mohamad Abouchalbak : While Paris has everything it takes to attract users and investors, Paris City Council, as part of its new bioclimatic Local Town Planning Scheme, has been quite ‘innovative’ in the solutions it has found to increase the proportion of housing at the expense of offices. This is a real sword of Damocles hanging over investors in the capital, as the consequences of these changes on office asset valuations are still unclear and potentially binary.

With the vacancy rate in inner Paris already very low, a sign of very strong demand that is struggling to find the corresponding supply, the new provisions of the bioclimatic LTPS are likely to lead to an even greater shortage of quality office space, which in turn will put upward pressure on rents. In practice, rents are reaching record levels (over €1,100/m² for a flagship building), which goes hand in hand with heightened expectations and demands on the part of users.

Although reducing office space is part of the strategy of many companies, it rarely totals  more than 30% of floor space. Demand will always be there, but we are aware that the rents charged in Paris, and particularly in the CBD, can only cater for a certain category of users. We believe that the effect already seen before the health crisis, i.e. a natural expansion of the CBD to the east and west of Paris, will be reinforced. We believe that towns such as Neuilly-sur-Seine and Levallois-Perret are very attractive, in that they have fewer constraints, but benefit from a very high quality of life and excellent accessibility.

Do you have a concrete example that illustrates these trends?

Samy Bchir : The current redevelopment of the building at 18, rue de l’Amiral Hamelin, in the CBD, is a perfect example. This is an emblematic project that we are carrying out in the central business district, in partnership with SFO Capital Partners.

Our vision for this unique project is to offer future occupants much more than just the elegance of this private mansion dating from 1895. We want to provide them with an upmarket package of services, creating a modern working environment that stimulates talent and serves as a flagship for a company’s image. In this project, where we aim for the highest standards of excellence, we are working with talented partners, in particular the firm Axel Schoenert, which has redesigned the building to make it more contemporary and flexible.

The project has been designed in such a way as to enhance the green spaces, such as the creation of a vertical greenhouse and upgrading the existing terraces to more green spaces. In addition, everything has been designed to bring nature and natural light to the different levels and create high-quality workspaces.

We are also committed to an ecological approach, and the project is aiming for the following certifications: Breeam Excellent, HQE Excellent, BBCA and Wired Score.