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The outbreak of the Covid-19 health crisis at the beginning of 2020 — as well as the subsequent sudden return of high inflation, and the change in monetary policy in mid-2022 — has led the French non-residential real estate market into an ongoing crisis, the extent of which is currently difficult to determine. 2023 saw a sudden and very steep drop in investment volume. This downturn intensified in H1 2024: -51% in 2023 and -46% in H1 2024. There has also been a concurrent decline in take-up, (-16% in 2023 and -5% in H1 2024), accompanied by an increase in immediate office supply that has reached unprecedented levels.

Added to these flagging indicators are questions about a possibly profound market restructuring taking place. This is mainly due to lower demand for office space with the increase in remote working, as well as the cost impacts of green policy-based regulatory constraints, and the obsolescence of a significant amount of office stock.

In the past 40 years, the French commercial real estate market has gone through five major crises, each affecting the rental and investment markets to different degrees. “Crisis” comes from the Greek “krisis” and the verb “krinein” which means “to sift, sort, or separate grains”. Crisis, despite their brutality, should also be regarded as a pivotal moment, redefining the fundamental conditions of both the present cycle and the eventual market rebound.

In order to better appreciate the contours of the current crisis, we have chosen to take a look in the rearview mirror: how has the commercial real estate market responded to the different economic cycles since the beginning of the 1990s? What lessons can we draw from these responses to shed light on the current predicament?

This re-examination should allow us to take a step away from the fog of the present. Most critically: are we witnessing a natural rebalancing between supply and demand, or a genuine market paradigm shift?

Since mid-2022, when a new market cycle began, much attention has shifted to the latest “rising stars ” of the French real estate market: SCPIs. How resilient are these real estate investment vehicles in the face of the ongoing upheavals in the French business environment? What of the rise in key interest rates and their impact on asset values? With regard to the challenges that are now on the minds of all real estate players, are new realities such as changing workplaces and environmental issues primary concerns?

We have been approached by many parties for advice regarding these new market complexities. In order to provide expert guidance, the Catella Capital Markets teams and MBE Conseil have combined their know-how and their databases to share their vision and analyze these major real estate market players.

Through this study, we aim to share the knowledge gained by our daily experiences, both as market players and as keen observers of the major “tectonic shifts” that are profoundly reshaping real estate markets.

Non-residential real estate is largely a long-term industry. Thoughtful and insightful analysis of long-term market trends allows for clearer insight to emerge from the fog of current events, and from the various obstacles typically encountered in the course of our professional operations.

We hereby offer you our expert analysis and insight, gained through our daily interactions with our clients, the data we have collected and the experience we have gained through the deals we make together.

Since the Covid health crisis of 2020, the sharp increase in the overall supply of office space in the Île-de-France region – coupled with consistently disappointing take-up levels – has drawn greater attention to the drag on the office market created by the abundance of second-hand buildings, many of which do not offer the types of modern features that would appeal to tenants. At the same time, despite a severe housing shortage in Île-de- France, exploitable land is in short supply. A major reason for this is national and regional restrictions meant to combat land artificialization as part of declared net-zero emission objectives.

A casual observer may think a solution is obvious: repurpose these “obsolete” office buildings and turn them into housing: an approach that would also release far less carbon than demolition. Furthermore, the “loi Elan”, adopted in 2018, provides financial extra building rights up to 30% for converting or renovating former offices into housing.

But obviously, current market reality is more nuanced. The ability to convert and repurpose office buildings clearly represents a valuable tool for urban development, consistent with the declared sustainable development objectives shared by residents, public authorities and investors. However, the ongoing office market crisis should be put into perspective: while within-a-year supply in Île-de-France reached 6 million sqm at the start of 2023, there are not as many buildings to transform and, although take-up has slowed, businesses continue to seek out suitable office space. Moreover, in addition to the various technical, regulatory and political constraints commonly being faced, financial considerations are presently often the deciding factor limiting both the number and the nature of office space conversions. It is important to keep in mind that not all transformation projects are housing related, and that office-to-residential transformation projects are only a limited aspect of overall urban renewal policies.

The fight against land artificialization is taking shape.

Ecological challenges in the context of urban development have become more prominent in recent years, with both regulatory and societal pressures now intensifying. At the national level, the Climate Resilience Law of August 2021 validated a mandatory reduction of the artificialization of natural agricultural and forest areas, with two major deadlines: 2030 for a half reduction and 2050 for achieving a net-zero artificialization. At the regional level, the Île-de-France 2040 master plan aims to reduce the rate of land artificialization by 20% per decade by developing suburban designated hubs, making these virtually the only areas where new construction would be authorized. This rate is slightly lower than the declared net-zero artificialization objectives, but Île-de-France must also address its severe housing shortage. The SDRIF 2040 project, which should be completed in July 2023, before a year of public consultations, aims to keep a 700,000 residential units per year construction goal, 30% of which will be social housing.

Sound local development strategies. A high quality of life. Modern and well-developed public transport links, including high-speed TGV train networks… These are the key words explaining the current boom in non-residential real estate in France’s regional markets. These positive characteristics used to be mostly seen in the biggest cities, but the Covid health crisis that began in 2020 has changed the game.

The lengthy periods of confinement spent away from the cities by some workers, as well as the increased ease of working remotely, especially for executives, are today key factors reshaping the dynamics of regional markets – including for job creation. Certain trends are evolving in ways which no longer automatically favour bigger cities. The major population centres and consumer markets in France currently show an urban expansion which has already been reflected in residential real estate prices.

With regard to investment in service-sector-related real estate, these changes are also evident in the influx that has flowed to regional markets. Since 2008, volume has increased as these markets have matured. Since 2020, the regional proportion of overall non-residential investment within France has risen, reaching 41% in the first half of 2022. (This is even more remarkable in that this figure does not include certain diversification assets such as hotels, leisure centres or healthcare facilities.)

For the past three years, the Île-de-France office market has been faced with a series of issues that have affected take-up levels. Among concerns about remote working, office flexibility and the ever-increasing need for centrality, major decisions have had to be delayed during this period. However, 2021 saw a recovery in take-up, with renewed interest in small and medium surfaces, a robust market in the 5,000-to-10,000 sq.m market, and a concentration of companies in the better established Île-de-France submarkets, especially within Paris and in the West CBD.

The outbreak of the war in Ukraine and the uncertainty regarding its impact on both the global and the French economy could cloud the prospects for a rebound in take-up in 2022. Nevertheless, the positive market indicators from 2021 could persist, or even grow stronger. The increasingly pressing need for more energy-efficient buildings will strengthen demand for compliance-certified buildings. With so many energy concerns, the need to reduce buildings’ carbon footprints should also continue to favour established, centralised business districts that have good public transportation links.

With these considerations in mind, two market trends appear to be of particular importance in our following analysis:

Firstly, new supply is plentiful. Its generally high quality and competitive economic rents should, however, encourage absorption of excess space, especially as construction starts have been lower. The speed of this absorption will depend on resumed take-up activity, especially for large surfaces. The submarkets with the most developed business districts, especially those having the best public transport networks, should experience market recovery ahead of their less established competitors.

Secondly, second-hand supply has experienced unprecedented growth. Since this is of mixed quality and has been driven by a high level of releases, it risks having a negative impact on vacancy rates throughout Île-de-France if no action is taken in the long term. Among possible measures, the transformation of some obsolete office buildings into housing or other types of businesses is an increasingly appealing option. A growing number of building owners appear ready to pursue these alternatives, and the success of the first reconversions is an encouraging sign, both for the absorption of existing stock and for the urban renewal of neighbourhoods in many cities.