Evolution of the Leasing Values x Sales Values in the Class A+ Market for Office Space
The deterioration of the economic situation in Brazil, especially starting in the second half of 2013, has affected the commercial leasing market, continually pushing prices lower and lower, at first very slightly until the middle of 2014 and later more significantly, until the beginning of the first half of 2016, when they began to fall slowly and stabilize, from that point on.
The major cause of this phenomenon is related to the economic recession, but specifically to the commercial building market, the cycle of property construction, from 4 to 6 years has a significant weight, for the case of large-scale development, between financial viability, purchase of land, legal approval for projects and development of detailed engineering designs, construction of the building and approval of the construction.
Considering that the euphoria of market 2011, 2012 and beginning of 2013 is a thing of the past, dealing with lack of production and prices rising sharply above adjustment for inflation ties directly to the recession of 2014; we have a direct impact on the value of the leasing market, first with over-correction and later, with an actual fall starting in mid-2015, due to the availability of new building stock that had been planned 4 to 6 years earlier.
Analyzing the production, purchase and sales market of the commercial real estate sector, we see that the products introduced starting in 2014 and, which brought about huge discounts from the moment the recession began, were actually made feasible from 2008-2011 (4 to 6 years earlier) by prices and conditions relative to this period, and however, before the sharp peak of the leasing market of 2011, 2012 and 2013.
Records of effectively negotiated contracts in major areas of the city of Sao Paulo between 2008 and 2011 ranged between R$ 70 and R$ 105 per square meter per month, depending on the year and the specific area, with an average of approximately R$ 85 per square meter per month for new buildings, which in current terms would be approximately R$ 122 per square meter per month, considering variation in the National Index of Prices for General Consumers (IPC-A) between June of 2009 and June of 2015. If we consider this number as the as the average feasibility of enterprises, we conclude that the range of pessimistic (-20%) and optimistic sensitivity (+25%) varied between R$ 97 and R$ 152 per square meter per month.
Moving on to the record of transactions that took place between 2014 and 2016, we see that the range of values of new ventures in the major areas was between R$ 85 and R$ 125 per square meter, with an average close to R$ 95 per square meter, essentially the lower limit of the range of feasibility described in the paragraph above.
Therefore, with an exception made for those investors who bought in the peak stage between 2011 and 2013 via entry in projects under construction or quotas of real estate funds, other investors, especially large developers, have rental income very close to the feasibility intervals of their projects, that is, they are currently experiencing an acceptable return on their investment that allows them to wait for an offer that pays for the asset. This is the fact that generates the apparent distortion in relation to the lease price and sale price in the market for class A+ office buildings, and limits the number of transactions in spite of the large amount of money that is in search of bargains on the market.