Uncertainty and the lack of clarity regarding real estate pricing are holding back investment transactions. Investors taking positions in the Spanish office market are mostly local players with long-term strategies, such as local mutual insurance companies and family offices, while international investors tend to adopt a wait-and-see position.
The Spanish family office Prallariz, for example, bought three office buildings in the first quarter of this year, totalling 35,000 square metres, for €300 million in Madrid centre.
When it comes to the mutual insurance companies, Mutualidad de la Abogacía acquired an office building in Madrid of over 6,000 square metres while Mutualidad de los Arquitectos, Arquitectos Técnicos y Químicos (known as HNA) acquired Torre Mizar, a fully let 7,000 square metres office building, for €36 million, according to Expansión.
Investors have moved from a buying position to focus on improving operational performance of their existing assets to increase income generation and partially offset the impact of yield expansion which is set to continue in 2023. Active management, building upgrades and prime positioning allow them to capture additional cash flows from indexation.
The main Spanish real estate investment trusts returned strong operational results in 2022, highlighting the strength of the leasing market for quality buildings.
Merlin’s office portfolio occupancy increased by 288 basis points in Madrid in 2022, up to 91%, according to its annual presentation, while like-for-like rents increased by 5.9%.
Colonial also captured a solid like-for-like rental growth of 6% in 2022 in its best-in-class Madrid office portfolio as its prime positioning allows additional cash flow from indexation.
Lease activity is expected to moderate in 2023 although the labour market activity is still supporting office leasing, mainly in central locations. The Spanish economy is set to grow by 1.65% in 2023, outperforming the eurozone by 1.06 percentage points, while office employment remains resilient and is expected to increase by 1.2% in Spain and 1.4% in Madrid in 2023, according to Oxford Economics.
To attract and improve tenant demand, owners like Merlin are looking to offer short-term and long-term workspace solutions as the offer mix has proven to be a successful model. An example is the recently refurbished Castellana 85, owned by Merlin, which houses Accenture's headquarters on conventional office floors while it also offers flexible office floors operated by LOOM, the REIT's flex brand.
Merlin will also offer flexible solutions managed by LOOM in its building in Plaza Ruiz Picasso, in the central business district. Its refurbishment is set to end this year. The building, with over 36,000 square metres, has already been preleased to top occupiers like IBM which will occupy over 10,000 square metres.
LOOM plans to continue to expand after increasing its footprint by 54% in 2022, reaching over 22,000 square metres of flex space and 83% occupancy.
While some owners focus on improving their service offerings and upgrading their office buildings to meet expectations, others opt for converting their buildings into other profitable uses such as residential or hotel.
This is the case for the Mahnaz fund, managed by Persepolis Investments, which will transform the 5,000 square metres office building at 27 Sagasta Street into luxury flats.
Brookfield will also convert the 4,600 square metres office building belonging to the Triángulo Princesa complex it bought last year into 57 luxury residences, plus retail. The construction of the project, named Hexagon Serviced Residence, is expected to start in 2023 and be completed in 2024.