In two years’ time, a €900 million loan secured against Paris office tower Coeur Défense will expire. It will do so in an office market radically altered from when it was issued in 2017 by banks BNP Paribas, Crédit Agricole, ING and Natixis.
As the building’s owners – managers Amundi Real Estate and Primonial, and French insurer Crédit Agricole Assurances – seek to refinance this sizeable debt in the coming months, they will be trying to convince lenders about two facts. Firstly, that Coeur Défense in itself – nearly two million square feet of office space built in 2001 – still has enough appeal in today’s occupier market; and secondly, that the purpose-built business district where it resides is not about to fall out of fashion as a workspace location.
This existential quandary is happening while over the channel in the UK, Canary Wharf, in London’s Docklands, is currently pivoting from a financial district to a mixed-use, residential and life science neighbourhood in part owing to the loss of high-profile traditional office tenants. This is most notably the case at 8 Canada Square, where major tenant HSBC has confirmed it will leave. Debt providers invested in Canary Wharf are feeling the consequences of all this change, facing testing times as office values fall in the meantime.
La Défense has not experienced the same degree of negative headlines as Canary Wharf, but some exist nonetheless. Awareness around the financial hub’s vacancy, for instance, is growing. According to property consultancy Savills, vacancy rose by 270 basis points to 15.7 percent in the last year.
Among tenants opting for central Paris instead are professional services firm EY, known as one of the district’s ‘Big Four’ occupiers, and French accounting firm Mazars. EY is moving from La Défense to Paris’s 8th arrondissement; while Mazars is leaving for a building in Levallois-Perret, an upmarket residential suburb northwest of the city.
On Paris’s doorstep
But those still invested in La Défense believe the area’s hallmark buildings like Coeur Défense will receive a competitive bidding process from prospective lenders and that the location remains appealing for both lenders and occupiers, despite the uncertainty.
Christophe Kuhbier, managing director at London-based private equity management firm Henderson Park, told Real Estate Capital Europe: “Coeur Défense will get refinanced. The debt will be more expensive than it was previously, but everyone has that challenge in this market.”
Kuhbier says La Défense, which comprises 72 skyscrapers, is closer to Paris’s centre than Canary Wharf is to London’s. This makes it a viable option for occupiers, especially for those companies that want a headquarters in Paris’s centre and back-office staff nearby.
The main transport station on the estate delivers commuters from the city centre in seven minutes. Proximity, Kuhbier says, provides La Défense with “future usage value”. Comparing the Parisian quarter to its London counterpart, he adds: “La Défense is on Paris’s doorstep, but Canary Wharf is in the suburbs of London.”
Last November, Henderson Park and Paris-based investment firm Weinberg Capital completed a repositioning programme at La Grande Arche de La Défense – a 1985-built asset with 495,000 square feet of office space. The renovation took occupancy from 70 to 95 percent.
“We can invest wherever we see a mismatch between price and value. We did not invest in Canary Wharf but we have invested in La Défense,” says Kuhbier. “La Grande Arche is an older building, but it is right on the main square next to the station, which is also the case with Coeur Défense.
“The Arche marks the centre of La Défense and is the most recognisable building in the district, which is why it attracts occupiers. It gives them an address and visibility that maximises the value they gain from the rent they pay. Today, that is vitally important and can be the difference between a successful building and one that isn’t.”
Spillover market
Kuhbier adds that La Défense also currently remains of value to occupiers because the district offers something central Paris does not: space to accommodate larger floor requirements. Central Paris is also extremely constrained, with just 2.6 percent of overall office stock unoccupied, according to property adviser Knight Frank.
Francesca Galante, co-founder and partner of debt advisory firm First Growth Real Estate & Finance, says La Défense is appealing to occupiers struggling to find space in central Paris. This is also helped by rents, which range from €450 to €600 per square metre per year, compared with rents of €1,000 per square metres per year for Paris’s CBD.
She is confident that buildings such as Coeur Défense will appeal to a wide range of lenders as the owners set about finding new debt capital, but says secondary office locations on Paris’s outer ring have the same existential challenges as Canary Wharf, and that lenders are seeing significant value falls in these areas.
Galante says: “La Défense’s location, critical mass, Paris’s skyrocketing rents, combined with the fact buildings have several tenants in one building, and the occupancy rates are good, means the area will continue to attract lender liquidity.
“But we have been involved in a lot of restructuring activity [in situations in] the outer peripheral areas, where there is very little demand. We anticipate there will be more of this to come.”
Peripheral declines
In markets such as Peri-Défense and the Northern Inner Suburbs – outer areas of the Greater Paris Region, vacancies are almost 20 percent, according to consultant Knight Frank.
During the first quarter of 2023, the agency reported that take-up in the Greater Paris Region had decreased 30 percent year-on-year, and 26 percent compared to the 10-year average – with tenants from these suburbs moving to La Défense instead.
There is further pressure to come, according to Florent Albert, senior director, head of commercial real estate loans and CMBS at ratings agency Scope. Albert is confident prime assets in La Défense “should generally” find refinancing solutions. But he believes it will be tougher for office owners in the periphery of La Défense to attract capital without “significant concessions” such as injecting equity or agreeing to higher margins.
“Capital values are down within a 10 percent range for the large Paris office assets we monitor,” says Albert. “Average declines are higher in the Greater Paris Region. We expect a further average decline of 10 percent in the coming months in Paris and likely more in outer regions as the first sales in this new environment will provide further pricing indications.
“In some sub-areas of Paris, the yield has shifted from low 4 to mid-5 percent or a 25 percent increase. In the meantime, rents have not increased by 25 percent. Therefore, owners will have to invest more equity to invest at a lower leverage level. But economics will not always make sense when the cost of debt is between 5 and 6 percent.”
Over the coming months, lenders and owners will be negotiating over these kinds of factors as the revolution in the office sector continues. But as Canary Wharf’s owners have learned to their cost, location is everything. In moving to London’s City market, HSBC has opted for the type of office currently being marketed in revamped, flexible workspaces in Canary Wharf itself.
But the City’s bustling, historic centre and connectivity to the rest of the city gave it the edge.
In complex times, an office’s location is a crucial consideration. As things stand today, La Défense appears to have a case.
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