Office Market Report JLL Research Report. Panama City, Panama

Transcription

1 Office Market Report 217 JLL Research Report Panama City, Panama

2 2 Macroeconomic Overview Long Tons Panama has kept its strong economic momentum going over the past year, with the economy set to exceed 5% annual growth in 217. Several key infrastructure investments particularly the expanded airport, the widened Panama Canal, and the Panama City metro are bearing fruit and enhancing the country s competitiveness. Growth has been driven by the logistics, tourism, health care, information, communication, and technology sectors. According to the Ministry of Labor and Labor Development, these sectors account for around 6% of employment and the majority of employment growth over the past year. Unsurprisngly, the Panama Canal was the biggest catalyst to the economy. In its first full year in operation after the expansion, the canal saw a 22.2% growth in cargo volume shipped over 216, and the 4 million tonnes passing through were the most ever in its 13-year history. According to data from the Canal Authority, the most trafficked routes were between Asia and the US East Coast (which accounted for 34% of all traffic), the west coast of South America to the east coast of the US (13%), the west coast of South America and Europe (7%), the west coast of Central America to the east coast of the US (7%), and intercoastal South American routes (5%). The US is the main user of the canal with 68% of all canal traffic either originating or terminating there, with China, Chile, Japan, Mexico, and Colombia following. While the leading shipping segments were dry bulk, containers, and chemical tankers, perhaps the sector that is most revolutionized by the expanded canal is liquified natural gas (LNG), a common source of cooking and heating in Panama as well as Latin America. The widened canal has made it possible for LNG ships to pass through and has paved the way for LNG terminals to be built in Colon, where the fuel will be refined and distributed for domestic use. This will provide much-needed energy diversification for Panama, a country that relies heavily on volatile oil imports. 3, 25, 2, 15, 1, 5, Source: Panama Canal Authority Panama Canal Traffic by Segment Dry Bulk Container Chemical Tankers Liquified Petroleum Gas Crude Product Tankers Liquified Natural Gas General Cargo Vehicles Refrigerated After historic levels of infrastructure investment, Panama saw a significant rise in its fiscal and current account deficits, which rose to 4% of GDP and 5.7% of GDP, respectively, in 216. Added fiscal revenue generation from the canal has helped to close the budget deficit to 1.4% of GDP this year, though the current account balance remains high. Other important measures have been taken to alleviate the national debt, for example the reduction of energy subsidies, which has also contributed to a slightly higher inflation rate compared to last year. A softer US Dollar this year has also benefitted Panama, as exports and canal fares (which are quoted in dollars) are relatively cheaper than they were a year ago, thus fueling more demand for these products and services. Source: Oxford Economics Politically, Panama continues to deal with the fallout of the Panama Papers and increasingly strong calls from the international community for more transparency in the country s banking system. The Odebrecht scandal that has affected much of Latin America has implicated ex-president Ricardo Martinelli, whose regime earned its reputation on its ability to fast-track large infrastructure projects. Additionally, several countries including its neighbor and strategic trading partner Colombia, denounced Panama as a fiscal paradise and threatened sanctions against individuals and companies found to be storing illicit funds here. In response, the government of President Juan Carlos Varela has enforced new anti-money-laundering (AML) legislation, which precipitated the removal of Panama from several international black lists. Other nominal measures have been impemented, such as providing information to OECD countries regarding indivivduals and companies suspected of tax evasion and avoidance. Still, the general consensus is that the government is dragging its feet on the matter, as political leaders have little incentive to implement regulations that ultimately could hurt the country s economy.

3 3 Office Market Map San Francisco 17% Stock Distribution by Submarket Bethania 3% Canal Zone 8% Costa del Este 26% Obarrio 46% Corozal Panama Canal Tocumen International Airport Port of Balboa Panama Metro, Line 1 (Built) Panama Metro, Line 2 (Projected) Panama Pacifico Naos Island Panama Metro, Line 3 (Projected) Panama Metro, Line 4 (Projected) Panama Metro, Line 5 (Projected) Panama Light Rail (Projected) In addition to the canal, the Panamanian government is investing significantly in urban infrastructure for residents of its capital. The first line of the Panama City Metro was completed in 215 with ridership stabilizing at nearly 18, passengers per day. Construction has since begun on Line 2 which will run nearly 3 km from Parque Urraca to the eastern suburb of Felipillo, with an expected completion date of 219. Additionally, the national government and the Panama Maritime Authority are promoting the development of Naos Island as a tourist destination and cruise port. The concession for a future cruise terminal was awarded to the Belgian company Jan de Nul and the Chinese company CHEC. Other future projects inside the city include a Roll-on Roll-off (RoRo) terminal on the Canal to accommodate the redistribution of vehicles and heavy machinery, the expansion of the Corozal container terminal, and a 1,2 hectare logistical park near the Port of Balboa. With regards to the city s office market, the most established submarket is Obarrio, which is the city s traditional business district and contains 46% of the total stock. Adjacent to Obarrio and to the east of Avenida Brasil is the submarket of San Francisco with 17% of the market stock. San Francisco is mostly lower density and boutique, with the notable exception of the Oceania and Las Americas towers. Further east lies Costa del Este, which in the last 5 years has established itself as the city s new business hub. Today Costa del Este contains nearly 26% of the market and many of the city s most emblematic new buildings. Canal Zone, which encompasses the Albrook neighborhood as well as the Panama Pacifico development on the old Howard Airforce Base, contains 8% of the market. Finally, Bethania, a suburban area in between the Tumba Muerta and Transistmica avenues, contains 3% of the market stock.

4 4 Market Overview The Panama City office market has seen an extraordinary amount of investment in the past few years. This has its roots in the 28 financial crisis, which prompted investors to move money out of core markets and into slightly riskier developing markets that showed promise and offered higher yields. Panama was a prime location for real estate investment at that time, since the passage of Law 41 of 27 encouraged multinational enterprises to set up a headquarters here in exchange for income tax exemptions. With new sources of office demand and a limited market, an abundance of projects were launched, culminating in the first significant wave of office supply 25, m2 that became operational in 212. Supply remained high in the following years, as the investment community grew bullish on the potential economic spillovers that the widened Panama Canal and metro would bring. Yet demand has failed to respond for the most part. After reaching a peak of approximately 11, m2 in 215, net absorption has fallen steadily over the past few years. In 217 net absorption was just shy of 9, m2 not a negligible amount, but short of supply for the 8th straight year. The yawning gap between supply and demand has kept the city s vacancy rate above 4% since 214, making it one of the most oversupplied markets in the world. Investors and developers are growing frustrated with high vacancy and falling yields, and many are responding by cancelling and postponing new projects. Between 218 and Indicator Trend Stock (m 2 ) 1,55, Net Absorption, 217 (m 2 ) 89, Production, 217 (m 2 ) 15, Under Construction (m 2 ) 128, Vacancy Rate 4.1% Total Vacant Area (m 2 ) 65, Asking Rent: Class A (USD/m 2 /month) $1-25 Asking Rent: Class AB (USD/m 2 /month) $9-24 Asking Sale: Class A (USD/m 2 ) $1,5 2,2 Asking Sale: Class AB (USD/m 2 ) $2,2 3, Cap Rates 7-11% Sample Size 14 buildings 219, only 13, m2 of new production are expected to be completed. This is a very welcome sign: it should allow for demand to catch up, pushing vacancy down and putting upward pressure on rents. Another issue facing the market is the uncertainty relating to the country s accounting standards. Lax financial reporting standards are a key factor in making Panama a global financial hub. However the international community has been increasingly vocal in demanding that Panamanian financial regulators comply with internationally accepted standards for sharing financial information of individuals and companies. This very well could be having a dampening, as shell companies and offshore legal entities contribute to overall office demand. Historic Production, Absorption, and Vacancy Rentable Area (m2) 3, 25, 2, 15, 1, 5, Production (m2) Absorption (m2) Vacancy Rate (%) Forecast 5% 45% 4% 35% 3% 25% 2% 15% 1% 5% % Vacancy Rate Source: JLL Research

5 5 Supply and Demand Rentable Area (m2) Rentable Area (m2) 2,, 1,8, 1,6, 1,4, 1,2, 1,, 8, 6, 4, 2, Cumulative Market Stock Corporate Buildings Market Evolution The Panama office market has essentially doubled in stock over the last 5 years, with over 8, m2 completed over this span. Developments in Panama are typically large and highly fragmented in their ownership. They are large because of lax zoning codes that often waive restrictions on height, resulting in an average leasable area of nearly 12, m2, the highest average in Latin America. Buildings in Panama are often fragmented because of a dominance of the pre-sale / condominium financing model and general lack of real estate investment funds. This has led to a market that is highly oriented towards office investors rather than users. JLL estimates that about 25% of the market is contained in buildings that are owned by a single landlord while over 7% of the market is contained in condominium-structured buildings; the remaining 5% is in buildings that are occupied entirely by one company. This high proportion of fragmented stock means that many buildings will inevitably face issues with long-term property maintenance and tenant retention, both issues that require some degree of coordination among multiple or all landlords in the building. Panama s office supply boom has been concentrated mainly in the Costa del Este and Obarrio submarkets, which together have accounted for 75% of all office production between 8, 7, 6, 5, 4, 3, 2, 1, Stock: 211 Stock: 214 Stock: 217 Stock: 219 Stock by Submarket Bethania Canal Zone Costa del Este Obarrio San Francisco Corporate Buildings Rentable Area (m2) 211 and 217. Over the next two years, production in Obarrio will slow down, however Costa del Este will remain dynamic, claiming 55% of the coming production pipeline. JLL believes that the market will continue to gravitate away from the center city and towards the airport corridor thanks to a combination of factors that are plaguing Obarrio and other urban districts: high density, traffic congestion, high vacancy, and high land prices. High urban density makes acquiring land very costly, pushing prices beyond $1, / m2 in some cases while land near the airport is around $2-5 / m2. Traffic conditions are hurting demand, which is generating high vacancy and therefore hurting expected returns on real estate projects. While Costa del Este is also suffering from high vacancy, cheaper land prices and the ability to acquire large land parcels offer better potential returns for investors. 8, 7, 6, 5, 4, 3, 2, 1, -1, Production and Absorption by Submarket, 217 Production Y-o-Y (m2) Absorption, Y-o-Y (m2) Vacancy Rate Bethania Canal Zone Costa del Este Obarrio San Francisco 6% 5% 4% 3% 2% 1% Office absorption in 217 reflected this narrative. Despite higher production in Obarrio, Costa del Este saw more leasing with 38, m2 of net absorption compared to the 33, m2 seen in Obarrio. In all these two submarkets accounted for nearly 8% of total demand in the market. Vacancy is currently highest in Obarrio, where nearly 5% of the stock is unoccupied. San Francisco and Bethania are currently at about 37%, and the Canal Zone and Costa del Este are at about 29% each. The fact that Obarrio saw significant net aborption is certainly influenced by falling rents, as shown on the following page. Landlords in several Class A buildings are offering rents as low as $1/m2/month. Another factor that has contributed to demand this year has been the relocation and consolidation of public sector agencies, who are taking advantage of the current market context to upgrade their work space. % Vacancy Rare

6 6 Asking Rates (US$/m2/month) $3 $25 $2 $15 $1 $5 $- Rents Historic Rental Rates and Vacancy Class A Average Rent Class AB Average Rent Vacancy Rate 5% 45% 4% 35% 3% 25% 2% 15% 1% 5% % The soft market has significantly affected rents over the past few years. Since market vacancy has peaked in 214, asking rents have fallen considerably, with Class A rents down by over 5% and Class AB rents down 4% from 216 levels. In general, rents have fallen by nearly 15% total since their peak level in 213. The effect has been more pronounced in the Class A segment, since this is where the most acute oversupply is concentrated. In the San Francisco submarket, in particular, Class A buildings offer far lower rents than Class AB buildings. The result is that in many parts of the city, with the exception of Costa del Este and the Panama Pacifico development, there is almost no longer a premium for Class A buildings. Vacancy Rate del Este are currently between USD $19-25/m2/month, while Class AB rents are between $17-24/m2/month. Rents in the Canal Zone are at $22/m2/month for Class A and between USD $16-21/m2/month for Class AB. In Obarrio and San Francisco, Class A buildings are typically asking between USD $1-24/m2/month for Class A and USD $12-23/m2/month for Class AB. Finally, rents in Bethania are generally between USD $13-16/m2/month. Sale prices are currently ranging between USD $2, 3,/m2. Office capitalization rates have fallen as well, as high vacancy and lower rents are hurting investor returns. Typical cap rates in Panama are currently between 7-11%. While rents are down in Costa del Este since 215, they remain higher than other submarkets. Class A rents in Costa Average Asking Rent, USD/m2/month $26 $24 $22 $2 $18 $16 $14 $12 $1 Rents by Submarket, Forecast Obarrio Costa del Este Canal Zone San Francisco Bethania Total Source: JLL Research

7 7 Typical Market Practices Standard Unit of Measurement Unit of Measurement Square Meters (m 2 ) Lease Contracts Rent Quoted in US$ /m² /month Typical Lease Term 3-5 years Frequency of Rent Payment Monthly Deposit / Lease Guarantee Equal to 1 month of rent (last month of contract) payable to the Panama Ministry of Housing (MIVI). Required by law. Security of Tenure Only for the duration of the tenancy. No guarantee beyond the original lease term Statutory Right to Renew No (unless an option to renew is agreed at the outset and specified in the lease) Basis of Rent Increases or Rent Review Frequency of Rent Increases or Rent Review Agency Fees Agency Fees (payable by Landlord / Tenant) Legal Fees (payable by Landlord / Tenant) Rent Free Period Case-by-case basis, CPI (typically indexed as a percentage of local CPI, but this can vary) Depends on contract Transaction Fees 2 months rent Incentives Landlord / Tenant Each part responsible for its own legal costs 1-3 months The rent free period is not standardized in the local market, however it typically occurs. The length of this period is negotiated between the parties and is also a factor of how much (if any) tenant improvement allowance will be provided. Local Property Taxes VAT on Rent & Service Charge (Payable by Tenant) Taxes Landlord, annually 7% (ITBMS) Service Charges, Repairs and Insurance Service Charges/Managements Fees Utilities (Sometimes separately metered, sometimes paid as a percentage of occupation) Car Parking Internal (Tenant Space) Common Areas (reception, lift, stairs, etc.) External / Structural Building Insurance Sub-Letting & Assignment Early Termination Tenant's Building Reinstatement Responsibilities at Lease End Foreign Ownership Strata Title (Partial ownership of the building) Security Deposit Agency Fees Legal Fees Other Transaction Costs Additional to the rental charge and payable monthly in advance Electricity, telephone, AC, etc. paid by tenant according to consumption 1 space per 5 m 2 included in the lease contract; newer class A buildings will offer more spaces for additional fee Tenant Landlord (charged back via service charge) Landlord Disposal of Leases Both landlord and tenant Normally yes (subject to landlord approval) Unless otherwise stipulated in the rental contract, tenant is responsible for paying the entirety of the contractual obligation Case-by-case basis, depending on lease agreement; typically requested in original condition, given normal wear and tear. Purchasing Properties No restrictions Strata title ownership is typical Case-by-case 3% paid by the seller. Each party responsible for its own legal costs Typically paid by buyer

8 8 Want more? Managing Director, SIOR Associate Director Zach Cheney zach.cheney@am.jll.com Scott Figler Scott.Figler@am.jll.com About JLL About JLL Research JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. A Fortune 5 company, JLL helps real estate owners, occupiers and investors achieve their business ambitions. In 216, JLL had revenue of $6.8 billion and fee revenue of $5.8 billion and, on behalf of clients, managed 4.4 billion square feet, or 49 million square meters, and completed sales acquisitions and finance transactions of approximately $145 billion. At the end of the second quarter of 217, JLL had nearly 3 corporate offices, operations in over 8 countries and a global workforce of nearly 8,. As of June 3, 217, LaSalle Investment Management had $57.6 billion of real estate under asset management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit JLL s research team delivers intelligence, analysis and insight through market-leading reports and services that illuminate today s commercial real estate dynamics and identify tomorrow s challenges and opportunities. Our more than 4 global research professionals track and analyze economic and property trends and forecast future conditions in over 6 countries, producing unrivalled local and global perspectives. Our research and expertise, fueled by real-time information and innovative thinking around the world, creates a competitive advantage for our clients and drives successful strategies and optimal real estate decisions.