M2
We create value from property
4 | M2 | SPRING 2016
Summary “Strong drivers such as low total financing costs, attractive relative returns and significant interest from foreign investors will keep the yield low, but a tighter lending market means that we are likely to see a slight increase in the yields” Jo W. Gullhaugen, Head of Research
BERGEN Prime yield: 5.0% Office vacancy: 10.0 % Trend: Rental price Vacancy
STAVANGER Prime yield: 6.0 % Office vacancy: 10.1 % Trend: Rental price Vacancy
TRONDHEIM Prime yield: 5.75 % Office vacancy: 9.0 % Trend: Rental price Vacancy
OSLO Prime yield: 4.0 % Office vacancy: 7.8 % Trend: Rental price Vacancy
5 | M2 | www.union.no
OFFICE
LOGISTICS
RETAIL
YIELD
YIELD
YIELD
4.00
5.75
4.50
Prime yield for offices fell by 0.5 percentage points during 2015 and is currently estimated to be 4 percent. Strong drivers will continue to keep the yield low, but the situation in the financing market means that we expect a slight increase in the yield.
The yield for logistics fell by 0.5 percentage points to 5.75 percent in 2015. We believe that demand for logistics properties will continue to be strong, but that the yield will remain at the current level. Properties with extraordinarily long contracts may achieve lower yields.
UNION estimates the prime yield for shopping centres at 4.5 percent, while prime high-street retail properties can achieve yields of just under 4 percent. Big box retail properties typically achieve a yield around 6 percent.
TRANSACTION VOLUME 140 128
120
100
80 75 68
60
64
40
20 Figures in NOK billion. Only transactions with a value over NOK 50 million are included.
0 2003
2005
2007
2009
2011
2013
2015
7 | M2 | www.union.no
Contents
Summary 4 Contents 7 Leader 9 2/ Macro Macro 12 Labour market 14 Financing 16 3/ Transaction market
20
4/ Segments Office 26 Retail 28 Logistics 30 Hotel 32 5/ Areas Bergen 36 Trondheim 38 Stavanger 40 6/ Office rental market in Oslo Supply 44 Demand 46 Analysis of rent levels 48 Rental growth forecast 50 Office areas 52
Leader
9 | M2 | www.union.no
Jo W. Gullhaugen UNION Gruppen Head of Research
After the record transaction year comes...? Before oil prices plummeted in 2014, there would have been long odds against a 75 percent decline in oil prices coinciding with a record transaction year and record-high property prices. The prime yield has fallen by one percentage point during the same period that oil prices have halved two times. Low office demand and a weaker rental market has been overrun by other strong drivers. Perhaps the strongest driver has been good financing availability at very reasonable rates. Record-low interest rates, banks that were willing to lend and falling bank margins were recurrent themes until summer 2015. Since then, the willingness to lend has declined and bank margins have risen by around 0.5 percentage points. However, interest rates have continued to fall, so the total cost of borrowing remains attractive. Despite this, the financing market has definitely become tighter, putting upward pressure on the yield. However, other important drivers, such as the attractiveness of real estate investments relative to other investments and foreigners’ interest in Norwegian property, remain intact and will help keep yields at a low level.
The rental market in Oslo underwent a price correction in 2015, particularly in areas with exposure to the oil industry. Demand for office space will remain low this year due to moderate employment growth and pessimism on the part of companies. Fortunately, supply is also low. We estimate that net growth in office space will be zero this year as the level of conversion will be roughly equal to new construction. Consequently, office vacancy is expected to follow a flat trajectory. The outlook for the rental market is uncertain, but if the macroeconomists are right in their projections that the growth rate in the Norwegian economy will normalise from 2017 onwards, conditions will be in place for good rental growth in 1-2 years’ time. The supply side will also be very moderate in 2017 and 2018. In 2017, we actually expect the total office building stock to decline due to a higher level of conversion than new construction. The combination of increasing demand and low supply growth will result in a decline in vacancy rates and gradually put upward pressure on rental prices. We believe that smart investors will generate strong returns in the property market in the future, but it is no longer possible to let falling interest rates and declining yields do the job. A selective approach and “good craftsmanship” will be more important in the years to come.
2/ Macro
“The bank margin increased further by 0.18 percentage points on average from November to February. The total margin increase since Q2 2015 is therefore 0.49 percentage points.”
12 | M2 | SPRING 2016
Macro
Macro Oil prices create downward pressure, but dampening measures are working
Sustained excess supply and a battle for market share among countries that previously collaborated to keep prices high have contributed to a decline in oil prices of about 75 percent over the last 18 months. Uncertainty related to demand from developing economies has also contributed to weak growth for commodities in general. Low oil prices are affecting the investment decisions made by players in the oil industry and therefore growth in the Norwegian economy. As a result, GDP growth is also expected to be moderate in 2016, before normalising from 2017 onwards. The effects of the oil price decline are partly offset by the sharp depreciation of the krone in the wake of the downturn in the oil industry. The depreciation has increased the competitiveness of businesses competing in international markets, stimulating exporters, import-competing firms and the tourist industry. Expansionary monetary and fiscal policies have also contributed to dampen the effects of the decline in oil prices. In contrast with many other European countries, Norway still has the ability to apply traditional monetary policy measures such as lowering the key policy rate to stimulate the economy. In addition, the oil fund provides the flexibility to implement expansionary fiscal policy measures if necessary. So far, the fall in oil prices has had a skewed impact on the Norwegian economy. It is primarily oil-related businesses and the oil exposed counties of Western and Southern Norway that have experienced weaker growth.
*Source: NAV
The unemployment* figures show that the nationwide increase over the last 12 months can be attributed in its entirety to the increase in the oil exposed counties of Western and Southern Norway. In Oslo,the unemployment has decreased slightly over the last 12 months. Norges Bank’s regional network from Q4 shows zero production growth over the last three months, and the survey confirms the divided nature of the Norwegian economy. The regional differences have increased, with Western and Southern Norway experiencing the weakest development. As expected, oil-related companies in particular reported a significant downturn in production. Companies in the export industry and service-related companies reported higher activity growth. Norges Bank’s expectations survey shows that companies’ outlooks for the next 12 months continue to be weak. While 29 percent of companies expect to reduce their staffing, 26 percent expect to take on more staff during the coming year. An important question for the Norwegian economy is how consumers will react to the economic uncertainty. If the Norwegian consumers decide to reduce their spending, there will be serious negative consequences for the economy. Growth in retail has been moderate but relatively robust given the macroeconomic conditions in 2015. However, the growth rate appears to have weakened throughout 2015. Opinion’s consumer confidence index for Q4 shows that Norwegians are worried about the development in the Norwegian economy, but remain relatively positive about their own personal finances over the next 12 months. Continually low interest rates and a historically high propensity to save will prop up the level of consumption in the period ahead.
13 | M2 | www.union.no
Macro
Key figures for the Norwegian economy Annual change, %
2012
2013
GDP (mainland)
3.8
2.3
GDP
2.7
1.0
CPI
0.8
2.1
2.0
Private consumption
3.5
2.7
1.7
Public consumption
1.6
1.0
2.9
Oil investments
15.1
19.3
(2.9)
Traditional exports
2014
2015E
2016E
2017E
2018E
2.3
1.5
2.0
2.6
2.7
2.2
1.8
1.7
2.1
2.2
2.2
2.8
2.1
1.6
2.3
1.5
3.2
3.3
2.6
3.5
2.1
2.3
(14.1)
(13.6)
(4.2)
(0.2) 3.6
(0.2)
1.3
2.5
5.4
4.2
3.3
Employment
2.1
1.1
1.1
0.7
0.7
1.4
1
Unemployment (level) LFS
3.2
3.5
3.5
4.4
4.6
4.4
4.3
2018E
Source: Statistics Norway, December 2015
GDP growth for Norway's trading partners Annual change, % USA Emerging economies China Eurozone
2012
2013
2014
2015E
2016E
2017E
2.3
2.2
2.4
2.5
2.5
2.5
2.3
N/A
3.2
2.7
0.7
1.8
3.6
3.9
7.5
7.7
7.3
6.8
6.2
6.0
5.8
(0.5)
(0.4)
0.9
1.5
1.6
1.7
1.7
UK
0.0
1.7
2.9
2.4
2.4
2.4
2.2
Norway (mainland)
3.8
2.3
2.2
1.4
1.1
1.9
2.3
Sweden
1.3
1.3
2.4
3.3
3.0
2.8
2.5
Norway’s trading partners
0.8
1.3
2.1
2.2
2.2
2.4
2.4
Source: Norges Bank, December 2015
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Macro
Labour market Weak development in the short term, with increasing growth rate from 2017
The consensus expectation of employment growth during 2016 is a modest 0.5 percent. The rate is then expected to normalise as the economic conditions improve from 2017 onwards. Overall growth in numbers employed in the period 2016 - 2018 is expected to be about 60,000. It is also worth noting that employment normally grows considerably faster in Norway's largest cities than in the rest of the country, and that office employment historically has increased more than other sectors. In 2015, around 5,000 new jobs were created in Oslo, corresponding to a growth rate of about 1.4 percent. In its “Economic Overview” published in December 2015, the Confederation of Norwegian Enterprises (NHO) reports that their member organisations are expecting employment growth of 0.3 percent in 2016. Not unexpectedly, petroleum-intensive industries bring down the average, with an expected negative employment growth of 2.4 percent.
*Statistics Norway.
The Manpower Employment Outlook Survey for Q4 also indicates weak employment growth in the short term. Of the 751 participating companies, 6 percent stated that they expect to increase their staffing , whilst 5 percent said they expect a reduction. This is the bleakest outlook since the financial crisis. Because the workforce is growing faster than employment, unemployment rose to 4.6* percent last year - an increase of about one percentage point. Looking at the geographical distribution of the increase in unemployment numbers, there is a clear division based on the impact from the downturn in oil prices. As shown in the graph, the increase in oil-intensive counties accounts for the entire national increase. In Oslo, unemployment has actually decreased in the last 12 months. In 2015, the Norwegian Labour and Welfare Administration (NAV) was notified of a possible 49,600 redundancies or layoffs. The corresponding figure for 2014 was 23,700. Rogaland accounted for 14,400 of the notified redundancies, with other oil-intensive counties also contributing strongly to the large number of notifications in 2015. Companies planning to lay off more than 10 employees are required to notify NAV at least 30 days in advance.
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Macro
Employment growth in Norway Annual change, %
2012
2013
2014
2015E
2016E
2017E
2018E
DNB Markets - January 2016
2.1
1.2
1.2
0.9
0.5
0.4
0.7
Central Bank of Norway - December 2015
2.1
1.3
1.1
0.7
0.3
0.6
1.1
Statistics Norway - December 2015
2.1
1.1
1.1
0.7
0.7
1.4
1.0
Consensus
2.1
1.2
1.1
0.8
0.5
0.8
0.9
53,400
31,100
29,600
20,200
13,300
21,300
25,100
Change in numbers employed
Change in unemployment over the past two years (number of people) 15,000 12,000 9,000 6,000 3,000 0 -3,000 All of Norway
Western Norway
Southern Norway
Mid-Norway
Northern Norway
Source: Norwegian Labour and Welfare Administration (NAV), February 2016.
Eastern Norway
Macro
16 | M2 | SPRING 2016
Financing A tighter lending market The financing market for commercial real estate is currently much tighter than it was at the same time last year. There are mainly two reasons for this. Firstly, banks’ funding costs have increased significantly. The credit spread for senior bank loans in Norway increased abruptly in autumn 2015 and has remained high since. This has resulted in the banks raising the margin on lending to customers. Secondly, the Norwegian Financial Supervisory Authority has adopted a more stringent approach than expected in relation to the Pillar II process of the Basel III framework. Several banks, including DNB, have received feedback from the Financial Supervisory Authority stating that they must increase their equity ratio more than the market expected. This has resulted in Norwegian banks becoming more restrictive in their lending practices in order to build up equity. Branches of foreign banks are not bound by this tightening, nor by the Norway-specific interpretation of the Basel 1 floor for capital requirements that caused BN Bank to withdraw from the market last year. As a result, they are more willing to lend. However, competition between banks has significantly weakened, which has been instrumental in pushing up bank margins. Foreign banks’ share of the total lending volume for commercial real estate is about 17 percent*. Bank margins showed a relatively flat development in the first half of 2015, but UNION’s Bank Survey for November showed that they had increased by about 0.31 percentage points since summer. The Bank Survey for Q1 2016 shows that this trend has continued. The average margin increased by an additional 0.18 percentage points to 2.14 percent from November to February. Since the low point in Q2 2015, the margin has increased by 0.49 percentage points in the standard case. This means that the margin has returned to roughly the same level as in Q1 2014, but is still 0.47 percentage points lower than in Q1 2013.
*Source: Stamdata and Norges Bank
The lowest bank margin offered in the last 3 months was 125 basis points. Two banks stretched to this level. Despite the increased bank margin, total financing costs remain at an attractive level. This is due to long-term interest rates having fallen further from already low levels. Total financing costs in the standard case rose from 3.17 to 3.25 between November and February. With regards to equity requirements, the banks have also become more stringent in the last 6 months. The average minimum equity requirement in the standard case has increased by 4 percentage points since Q2 2015 to 33 percent. Four of the seven banks in the survey now normally require equity of 35 percent or more. Three of the seven banks in the survey say they have the same appetite for lending as they did a year ago. Three banks say they will continue to lend to new and existing customers, but will be more reticent to do so than at the same time last year. The last bank says it will continue to lend to existing customers, but is very unlikely to accept new customers. We expect to see more banks transfer real estate loans to life insurance companies, like DNB has recently done. Under the terms of the Solvency II regulations, commercial mortgages represent an interesting asset class for life insurance companies, and transferring loans is an effective tool for banks as a means of strengthening their equity. Such measures will enable banks to normalise their lending growth much more quickly. The banks state that they are sceptical about areas with a large proportion of oil-related companies. In addition, the banks report that they are more sceptical towards properties with short contracts and secondary locations. Ownership structures without at least one strong conterparty and companies without an existing bank relationship are also less likely to receive funding. Furthermore, we expect that the segment with the smallest companies and transactions will experience the greatest increase in margins. BN Bank and Storebrand bank’s withdrawal from the market has also harmed the competition, as they were both active in this segment.
17 | M2 | www.union.no
Macro
Interest rate forecasts
Key policy rate
Spot
3M
6M
12M
24M
0.75
0.50
0.50
0.25
0.25
3-month NIBOR
1.10
0.85
0.65
0.50
0.50
10-year swap rate
1.58
1.75
1.75
1.75
2.00
Spread: 10-yr swap – 3m NIBOR
0.48
0.90
1.10
1.25
1.50
Source: DNB Markets, January 2016
Loan financing rates 6%
5%
4%
3%
2%
1%
5-year swap rate
0%
Bank margin new 5-year loans Q1 2010
Q3 2010
Q1 2011
Q3 2011
Q1 2012
Q3 2012
Q1 2013
Q3 2013
Q1 2014
Applies for new 5-year loans to finance centrally located office properties in Oslo, with full interest rate hedging, 70 % LTV and a remaining lease duration of 7 years.
Source: UNION
Q3 2014
Q1 2015
Q3 2015
Q1 2016
3/ Transaction market
“The transaction volume reached NOK 128 billion, which is almost twice as high as the previous record of NOK 68 billion in 2006 (..)”
20 | M2 | SPRING 2016
Transaction market
Transaction market 2015 - a record transaction year
2015 was an extreme year in the Norwegian real estate market. The transaction volume reached NOK 128 billion, which is almost twice as high as the previous record of NOK 68 billion in 2006 and three times as high as the average volume over the last 10 years. The market has been characterised by excess demand driven by low interest rates, significant interest in Norway and an attractive return relative to other asset classes. At the same time, many investors have chosen to sell in a market with historically low yields. This has brought very good dynamics to the transaction market. We expect 2016 to be another strong year, but the volume is likely to be considerably lower than in 2015. We project a volume of around NOK 75 billion this year. International investors were by far the largest buyers in 2015, and accounted for more than every third krone invested in Norwegian commercial real estate during the year. Foreigners were particularly visible in the largest transactions. Six of the 10 largest transactions last year involved foreign buyers. Expansive monetary policies with resulting record low interest rates in large parts of the world are creating an intense hunt for returns amongst major investors such as pension funds and investment funds. In the present low interest rate regime, they are struggling to achieve a satisfactory return and are allocating large amounts of capital where the current return is still attractive. As a result,
real estate funds around the world are experiencing record signup levels. At the same time, Norway has become an increasingly attractive destination for international investors. Compared with heavily indebted European countries where there is no population growth, high unemployment, low political stability and negative interest rates, Norway stands out as an attractive long-term investment prospect. Although many international investors have taken a piece of the Norwegian market this year, there are still many players wanting to make their first investment in the country. The biggest net seller in 2015 was real estate companies, selling property for a combined total of around NOK 16 billion. Many property companies have reduced their exposure, taking profits in a favourable market. However, many of them have also been active in purchasing processes and have a significant amount of capital to be put to work in the near future. DNB Livsforsikring’s substantial sales resulted in life insurance companies being the second-largest group of sellers last year. Other life insurance companies have taken a more balanced approach. 2015 also saw a very large number of portfolios changing hands. Seven of the 10 largest transactions in 2015 were portfolio sales. Another market trend saw many players engaging in profit-taking after a short holding period. Several properties were sold after being held for only 1-2 years, delivering a high return on investment.
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Transaction market
Purchase and sales volumes in 2015 International investors Club deals Private investors Others & confidential Norwegian funds Property users Insurance and pension funds
Purchases
Real estate companies
Sales 60
40
20
0
20
40
60
Figures in NOK billion. Investors are arranged in descending order based on net purchase volumes.
Source: UNION
Transaction volume 140 128
120 100 80
75
68
60
64
40 20 0 2003
2005
2007
2009
2011
Figures in NOK billion. Only transactions with a value over NOK 50 million are included.
Source: UNION. DNB Næringsmegling before 2008.
2013
2015
22 | M2 | SPRING 2016
Transaction market
Transaction market 2015 - the year of mega transactions
56 percent of the transaction volume in 2015 was related to transactions in Oslo and Akershus. If we include the rest of the eastern region, which contains some properties in major portfolio sales, this increases to 73 percent of the total volume. Oslo is the main point of focus for international investors, but properties with long contracts with renowned international counterparties have also attracted players such as Colony Capital to Stavanger. In addition, Partners Group, Starwood and Citycon also acquired geographically dispersed portfolios that bring with them significant exposure to other areas. 2015 was a record year in both number of transactions and total volume, but it was the volume that stood out the most. The number of transactions increased by 28 from 213 in 2014 to 241 last year, while the volume last year was NOK 64 billion higher than in 2014. In short, many very large transactions resulted in the transaction volume doubling from 2014 to 2015. The sale of Sektor to Citycon for NOK 12.3 billion was the biggest transaction of the year and an example of transactions that contributed to the average volume per transaction reaching a record high of NOK 530 million in 2015. The corresponding figure for 2014 was NOK 290 million. If the average transaction size in 2015 had been the same as in 2014, the volume for 2015 would have been NOK 71 billion.
This trend is also clearly visible when you add up the number of transactions over NOK 1 billion. In 2015, 28 such transactions were completed, while the average number of transactions over NOK 1 billion during the period 2010 - 2014 was 6. The number of transactions in the NOK 50 - 500 million segment was actually lower in 2015 than in 2014. In 2015, there were 175 such transactions with a volume of NOK 30 billion, while in the previous year there were 179 transactions, with a volume of NOK 34 billion. The broad market in 2015 was in line with 2014, while it was the largest transactions, usually involving foreign buyers, that constituted the difference in volume. Driven by significant interest from international investors, retail properties represented 30 percent of the total transaction volume in 2015. In addition to the aforementioned sale of Sektor, Meyer Bergman’s purchase of Søylen’s retail portfolio, Schage Eiendom’s acquisition of the Salto portfolio and Steen & Strøm’s purchase of Oslo City contributed to the high volume of retail transactions. International players were behind about 64 percent of retail transactions in 2015. By comparison, they were behind about 29 percent of office transactions and 19 percent of logistics transactions.
23 | M2 | www.union.no
Transaction market
Transaction volume in 2015 by segments Office (45%) Retail (30%) Logistics & Industry (10%) Residential (4%) Hotel (4%)
NOK 128 billion
Healthcare & Education (3%) Other (4%)
Source: UNION
Transaction volume in 2015 by region Oslo / Akershus (56%) Other South-East region (17%) South-West region(13%) Mid and Northern region (6%) Portfolios (7 %)
Source: UNION
NOK 128 billion
4/ Segments
“Reduced financing availability, lower loan disbursements and significantly higher margins are contributing to upward pressure on yields.”
Segments
26 | M2 | SPRING 2016
Office Strong drivers intact, but adverse impact from the financing situation
Despite a challenging macro situation over the last 18 months, interest in real estate investment has remained high. Excess demand resulted in the prime yield falling by 0.5 percentage points to a record low 4 percent in 2015. There are three main drivers that explain the excess demand over the last few years. Firstly, low interest rates and favourable financing terms have resulted in a high current return on leveraged real estate. Secondly, a low expected return on fixed income investments means that real estate is attractive in relative terms. Thirdly, Norway has gradually become a popular destination for foreign capital. The development of these drivers and the outlook in the rental market will be key determinants for the way in which property values will evolve in the coming years. UNION expects real estate investments to continue to be an attractive asset class. Low returns in low risk bonds and uncertainty in the equity markets make property investments an interesting option for many investors. We expect foreigners to continue to invest in the Norwegian market over the next few years. The conditions that make Norway an attractive destination for long-term investments will not disappear overnight. The development in the financing market and the outlook in the rental market are the two biggest areas of uncertainty at present.
The rental market in Oslo is characterised by low short-term office demand. However, as employment growth is expected to normalise from 2017, while the net supply of space is very low, due to a low level of new construction and significant conversion into residential housing, we believe there are good prospects for rental price growth going forward. Oil-dependent cities such as Stavanger and Bergen face greater challenges in the short term, and it will probably take longer for the rental market to recover. Reduced financing availability, lower loan disbursement and significantly higher margins is contributing to upward pressure on yields. We expect strong drivers such as low interest rates, an attractive relative return and keen international interest to keep the yield low. However, the situation in the financing market means we are likely to to see a slight increase in the yield . The gap between prime yield and secondary yield has steadily increased since the financial crisis, and we previously expected it to reduce somewhat. The aforementioned changes in the financing market mean that we no longer expect this in the short term, as secondary property is typically hit harder when the banks become more reluctant to lend. We therefore expect both the prime yield and secondary yield to show a relatively flat but slightly rising trajectory.
27 | M2 | www.union.no
Segments
Office transactions in Norway 60
120
50
100
40
80
30
60
20
40
10
20
0
0 2009
2010
2011
2012
2013
2014
NOK billion Number of transactions (right axis)
2015
Source: UNION
Prime and secondary yield development 9% 8% 7% 6% 5% 4% 3%
10-year swap
2%
Prime yield Secondary yield
1%
Spread: secondary vs prime
0% 2005
2007
2009
Source: UNION , interest rates from DNB Markets
2011
2013
2015
2017E
28 | M2 | SPRING 2016
Segments
Retail Foreign investors dominate the market The transaction market Within the retail segment, the 2015 transaction market was strongly influenced by the strong appetite from foreign investors for Norwegian property. Since the entry of Madison International and Partners Group into the Norwegian retail market in 2013 through acquisitions from Søylen and the Sektor portfolio, foreign investors’ interest has gradually increased, before it exploded in 2015. International investors accounted for almost two-thirds of the total transaction volume of around NOK 37.5 billion. They were also behind the two largest retail transactions of the year: Citycon’s purchase of the Sektor portfolio for NOK 12.3 billion, and Meyer Bergman’s acquisition of Promenaden Property for NOK 5.3 billion. An international investor was also behind the biggest single asset transaction of 2015. During Q4, DNB Livsforsikring sold the shopping centre section of Oslo City for NOK 3.3 billion to Steen & Strøm, which is co-owned by the French shopping centre company Klépierre and the international pension fund APG. It is not only the high street and shopping centres that have triggered interest amongst foreign investors. WP Carey has purchased a big box retail property in Alnabru outside Oslo, H.I.G. Capital has bought a portfolio of grocery stores, while Tristan Capital Partners has recently bought a big box retail portfolio. Norwegian investors’ purchases in 2015 include Olav Thon’s purchase of Odd Reitan’s half of a portfolio of four shopping centres they bought together in 2014, and Schage Eiendom’s acquisition of the shares from the other shareholders in the Salto shopping centre portfolio.
Despite weak consumer confidence, consumption growth held up in the first half of 2015. However, the growth slowed a little in the second half of the year. Working day corrected figures show that the sales volume for retail businesses in the period October - December 2015 was on the same level as in the corresponding three-month period in 2014. The sales volume for retail businesses for the full year 2015 was 0.6 percent more than in 2014. Growth in goods consumption is currently weaker than for services consumption, which so far has remained relatively stable. In addition, sales figures from shopping centres show that cafés and food outlets, and specialty stores have experienced better growth than other stores. Household income growth in 2016 will be affected by lower employment growth, lower wage growth and higher prices – factors which will contribute to dampen private consumption. On the other hand, the Central Bank of Norway will likely cut its key policy rate at least once, which in isolation will increase Norwegian households’ disposable income. Forecasts from Statistics Norway, DNB Markets and Norges Bank all point to a growth rate of about 1.5 percent in private consumption during the current year. Their expectations for 2017 differ greatly, but all three expect consumption growth to increase.
We define prime yield for high street shopping at about 4 percent, while shopping centres achieve yields down to 4.5 percent. Both categories have experienced yield compression of 0.25 percentage points since 2014.
Norwegian households have been saving more and more over the last few years, with levels now at a historically high level (around 10 percent). There is much to indicate that increased saving in this period coincides with changes in pension arrangements and households’ previous debt accumulation. It is therefore likely that the savings rate will remain at a high level in the period ahead. With saving already high and disposable income increasing as Norwegian households benefit from lower interest rates, it is unlikely that there will be a dramatic fall in consumption.
The rental market In January, the Norwegian Consumer Confidence Index rose from -11.7 to -10.1 points, but it is still at its third lowest level since the index began in 2007. For some time now, the index has shown very weak development, with 8 of the 10 weakest measurements recorded in the last year.
We still expect properties with a considerable element of revenuebased rents to show very moderate growth in rents in 2016, and in many cases, the growth will be weaker than the CPI. However, there are considerable differences between different retail properties, and we expect a continuing positive development for properties in the city centre.
29 | M2 | www.union.no
Segments
Purchase and sales volumes in 2015 International investors Norwegian funds Property users Others & confidential Private investors Club deals Insurance and pension funds
Purchases
Real estate companies
Sales 35
25
15
5
5
15
25
35
Figures in NOK billion. Investors are arranged in descending order based on net purchase volumes.
Source: UNION
Retail sales index 109
6%
106
4%
103
2%
100
0% year/year (r.a.)
97
-2% 2012
2013
2014
Retail sales excluding motor vehicles. Seasonally adjusted volume index.
Source: UNION
2015
Index (Jan 2012 = 100)
Segments
30 | M2 | SPRING 2016
Logistics High activity in the logistics segment
The transaction market In 2015 we registered a total transaction volume of around NOK 13 billion in the logistics segment, distributed across 37 transactions*. In comparison, the previous record was NOK 10 billion in 2010. Real estate companies were the most active group of investors, while syndicators were the biggest net buyers. One distinctive feature of 2015 was the emergence of international investors as major net buyers. Foreigners were behind the purchases of Raufoss Industripark and the Mongstad facility, as well as the purchase of Aberdeen Eiendomsfond Norge II and Storebrand Eiendomsfond. What distinguishes 2015 from previous years is that significant volumes of industrial facilities were sold. Other examples of this include the sale of the Akastor portfolio to Aker, Framo’s production facility outside Bergen, which was bought by a syndicate, and Herøya industrial park, which was acquired by Oslo Pensjonskasse. Around half of the volume in the logistics segment came from industrial facilities. We define the prime yield for logistics at 5.75 percent, down 25 basis points since 2014. Nevertheless, we have seen several transactions with yields below these levels involving extraordinarily long lease contracts. Since 2010, we have seen a predominance of syndicates, life insurance companies and international investors among the largest net buyers, while private investors, property users and property companies have been net sellers.
*Includes relevant sections of major portfolio transactions
The rental market There is very low vacancy in modern logistics buildings in good locations in Oslo, and there are few undeveloped sites. In February, no new buildings were advertised on the online marketplace Finn. no, which is in sharp contrast to the level of supply outside the city limits. Plans are in place to develop some 400,000 m2 along the motorways running into Oslo, distributed across 11 different projects. The large number of available projects will limit rental price growth as more tenants will opt for new buildings in Akershus if the spread in rents compared to Oslo becomes too great. In addition, many players are looking to centralise the logistics element of their operations to lower cost areas, e.g. Sweden. In this context, it is also worth noting that the significant depreciation of the Norwegian krone is currently having a counterbalancing effect. Stein Erik Hagen’s recently established online grocery operation, Marked.no, has leased 11,000 m2 in COOP’s old logistics hub in Østre Aker vei 264. This is one example of how increased e-commerce is increasing demand for logistics space in central locations. As more and more logistics properties in attractive locations are being converted into premises for other purposes with higher alternative values, this may put further pressure on rental prices for logistics properties in the immediate vicinity of Oslo. Rents in the logistics segment are largely dependent on the construction cost and special adaptation requirements of each individual building. Rents in Groruddalen are normally in the range NOK 800 - 1,000/m2 per year. For new construction in prime areas with a high degree of customisation and refrigerated areas, prices per square metre can easily be a few hundred NOK higher. Along the southbound motorway E6 (towards Vestby) and the northbound section (towards Gardermoen), rents are typically around NOK 600 - 700/m2 per year.
31 | M2 | www.union.no
Segments
Purchase and sales volumes in 2015 Club deals International investors Insurance and pension funds Property users Real estate companies Norwegian funds Others & confidential
Purchases
Private investors
Sales 4
3
2
1
0
1
2
3
4
Figures in NOK billion. Investors are arranged in descending order based on net purchase volumes.
Source: UNION
Number of vacant premises in Oslo and Akershus 250
200
150
100
50 Number of advertisements 12-month trend
0 Q1 2010
Source: UNION/Finn
Q1 2011
Q1 2012
Q1 2013
Q1 2014
Q1 2015
Q1 2016
Segments
32 | M2 | SPRING 2016
Hotel Extreme division in the market
The transaction market Two major transactions clearly stood out from the others in terms of deal-size in 2015. Stordalen and the Varner brothers’ purchase of the Royal Christiania, and O.G. Ottersland’s purchase of the Radisson Blu Gardermoen represented almost two-thirds of the volume. The total transaction volume within the hotel segment was a record high of NOK 5.3 billion. The volume is actually larger than the accumulated volume for the three year period from 2012 - 2014. Two hotels in Trondheim changed hands in 2015. Wenaasgruppen sold Hotell Grand Olav to the Swedish company Midstar, while Odd Reitan bought Olav Thon’s share in Hotell Britannia – a property they bought together in 2014. Christian Ringnes and the Sundt family reduced their holdings in Pandox last year by listing the company on the Stockholm Stock Exchange. They sold approx. 40 percent of their shares in the company, which had a year-end market value of SEK 31 billion, SEK 2.5 billion of which was attributable to hotels in Norway. Real estate companies have been by far the most prominent net buyers of hotels over the last 6 years, accounting for more than NOK 9 billion of the total volume of about NOK 14 billion.
*Source: SSB
The rental market In the wake of the significant depreciation of the NOK during 2014 and 2015, the number of overnight stays in Norwegian hotels increased by 6 percent to 21.7 million in 2015*. Foreign visitors accounted for about 6 million of the figure, corresponding to growth of more than 11 percent. This increase in activity led to a significant part of the hotel industry receiving a long-awaited boost in occupancy rates and revenue per available room (RevPAR). For Norway as a whole, RevPAR rose by 2.6 percent in 2015, but there are significant regional differences. The widely discussed duality of the Norwegian economy is clearly visible when looking at the profitability in the different regions. RevPAR in Oslo rose by 10.7 percent in 2015, while Rogaland, Hordaland and Sør-Trøndelag showed a decline. RevPAR in Rogaland showed a major decline of 20 percent in 2015, while Hordaland fell by 5.2 percent and Sør-Trøndelag by 2.6 percent. Oslo’s RevPAR in nominal prices is now close to being back to the same level as before the financial crisis. After several years of pressure on the profit margins from an overly active supply side, the Oslo market showed a flat development in the number of available rooms in 2015. By comparison, the growth rate of available rooms in 2014 was about 10 percent . Growth in supply in Rogaland (6 percent) and Hordaland (5 percent) put additional pressure on the room occupancy rates.
33 | M2 | www.union.no
Segments
Revenues per available room (NOK) 700
600
500
400
Oslo Rogaland Hordaland Sør-Trøndelag
300 2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Source: Statistics Norway, January 2016
Change in revenues per available room in Norway 15%
10%
5%
0%
-5%
-10%
Price Occupancy rate RevPAR
-15% 2006
2007
2008
2009
Source: Statistics Norway, January 2016
2010
2011
2012
2013
2014
2015
5/ Areas
“New construction activity has declined considerably in the Stavanger region, with only 50,000 m2 of office space scheduled for completion in 2015-2016. Nevertheless, we predict that the office vacancy will continue to rise, as net absorption is lower than growth in supply.”
Areas
36 | M2 | SPRING 2016
Bergen New investors enter the market
The transaction market 2015 was also a record transaction year in Bergen, with a volume of approx. NOK 8 billion distributed across 23 transactions. As usual, local investors made up a large proportion of the transaction market, but several syndicates, an unleveraged property fund and an international investor also took on exposure in the region. Storebrand Eiendomsfond Norge drew the longest straw in the battle for DNB’s new head office in Solheimsviken, which was sold by G.C. Rieber. A purchase price of NOK 1,472 million made this the largest transaction ever in Bergen. In addition, Trond Mohn’s sale of Framo Sjølivet to an Arctic syndicate and the Mongstad facility to EQT had a purchase price of more than NOK 1 billion. The Oasen shopping centre was probably also valued at more than NOK 1 billion when it was sold to Citycon along with the rest of the Sektor portfolio, before summer. The prime office yield in Bergen fell by 0.5 percentage points to 5.0 percent during 2015.
*Source: NAV **Source: DNB Næringsmegling
The transaction market Hordaland is the county with the second highest increase in unemployment over the last year, after Rogaland*. An additional 2,500 people are now unemployed, corresponding to an increase of 1 percentage point. In 2015, 114,000 m2 of new office space was added to the market in Bergen, representing a growth rate of 5.7 percent. A particularly high level of new construction activity, combined with weak development in the labour market, contributed to the office vacancy rate increasing by about 2 percentage points from February to September, and exceeding 10 percent**. The construction volume will return to more normal levels in 2016, with about 32,000 m2 due for completion. However, we expect that office demand will not be high enough to prevent a rise in vacancy during the coming year. Rising office vacancy and increased subleasing activity is affecting rental prices, which are under strong pressure, particularly in the oil-exposed areas such as Kokstad and Sandsli. Vacancy levels are very high in these areas, partly due to Statoil’s completion of a new 40,000 m2 building in Kokstad last year. Premises of a high standard and in a central location have only seen a moderate rental price correction. We expect this duality in the market to persist, at least in the short term.
37 | M2 | www.union.no
Areas
Transactions 10
30
8
25
6
20
4
15
2
10
0
5 2009
2010
2011
2012
2013
2014
2015
Source: UNION
High standard office rents NOK/m2/year 2,400 2,200 2,000 1,800 1,600 1,400 1,200 1,000 800 City centre
Marineholmen
Source: UNION/Kyte Næringsmegling
Fyllingsdalen
Sandsli
Kokstad
Number of transactions (right axis) NOK billion
38 | M2 | SPRING 2016
Areas
Trondheim High new construction puts pressure on rents
The transaction market 2015 was a very active year in Trondheim, with a record-high total volume of NOK 7 billion, distributed among 18 transactions. The largest sale was right at the end of the year when Statoil sold its two offices in Rotvoll and Stjørdal to a Pareto syndicate for a total price of NOK 1,755 million. Another major transaction at the end of the year was Prora’s sale of Trondheimsporten to Entra for NOK 680 million, representing a net yield of 6.4 percent. Trondheimsporten is a new building that is expected to be completed by the end of 2017, and has been leased to the City of Trondheim and NAV on 10-year contracts. Foreign investors still show only moderate interest in Trondheim. If we exclude shares in portfolio transactions, the Swedish company Midstar’s purchase of the Hotel Grand Olav from Wenaasgruppen was the only registered transaction involving a foreign buyer in 2015. Midstar’s purchase was also the first registered purchase by a foreign investor in Trondheim since Niam bought Pirsentret from Aberdeen in 2009. In Q4 2014, a syndicate set up by Clarkson Platou bought the centrally-located “Residencekvartalet” from Sparebank1. However, after a very short holding period, the syndicate sold the property in Q3 2015 to the Aberdeen-managed fund AP Nordic Investment. The prime office yield in Trondheim is estimated to be 5.75 percent, down 0.25 percentage points since 2014.
* Source: NAV ** Source: Norion ***Source: Dagens Næringsliv
The office rental market Unemployment in Sør-Trøndelag has risen by a moderate 350 persons* during the last year, corresponding to an increase of 0.2 percentage points. The labour market in the region has therefore been more resilient than in Bergen or Stavanger during this period. The office market in the Trondheim region is quite widely dispersed and has a large share of public sector tenants compared with other big Norwegian cities. A total of 54,000 m2 of new office space was completed in Trondheim in 2015**. This is the highest level registered during the last 15 years and is more than twice as much as in an average year. Nevertheless, office vacancy rates only rose from 8 percent in February last year to about 9 percent at the same time this year, which indicates a healthy demand for office space in 2015. There may also be a time lag effect present, which would imply that the effects from the large supply materialise in the vacancy figures in the near future. A further 27,000 m2 of new office space will be completed in 2016 and 40,000 m2 in 2017. We believe that these levels of construction are too big to be fully absorbed considering the modest outlook for demand. We therefore expect office vacancy to continue to rise in the coming year. Rental prices in Trondheim fell by about 5 percent between 2014 and 2015.*** We expect that rising office vacancy will contribute to a further decline in rental prices in some areas in 2016.
39 | M2 | www.union.no
Areas
Transactions 8
20
6
15
4
10
2
5 Number of transactions (right axis)
0
0 2009
2010
2011
2012
2013
2014
2015
Source: UNION
High standard office rents NOK/m2/year 2,400 2,200 2,000 1,800 1,600 1,400 1,200 1,000 City centre Source: Norion Næringsmegling
Lade
South corridor
Sluppen
East
NOK billion
Areas
40 | M2 | SPRING 2016
Stavanger Selective transaction market
The transaction market The transaction market in Stavanger was very active in the first half of the year, but new oil price declines appear to have made investors more cautious in the second half of the year. In the second half of 2015, we only registered two transactions in Stavanger, compared to 10 in the first half of 2015 and 20 in 2014.
It is likely that even more people than indicated in the statistics have left their jobs, as employees who have received redundancy packages or early retirement benefits normally do not have the incentive to notify NAV of their new employment status straight away. At the same time, many foreign workers without social security rights have probably returned to their home countries.
Despite the weak end to the year, there was a new transaction volume record of just over NOK 6 billion in 2015. The biggest contributor to total volume was the sale of Statoil’s head office in Forus to Colony Capital, for just over NOK 2.5 billion.
The weak development in the labour market has natrually contributed to low demand for office space. Office vacancy has risen from 7.0 percent at the beginning of 2014 to 10.1 percent in November 2015. ** However, there are large variations in the office vacancy, ranging from 6.5 percent in the city centre to 14.8 percent at Forus. The rise in the vacancy rate in Forus is also a consequence of the high rate of new construction in recent years, with growth in supply of about 30 percent in the period 2011 to 2014. However, it is worth noting that a lot of the office space that currently stands empty in Forus is old and only of a moderate standard.
Nine of the 12 transactions in 2015 had lease contracts with an average duration of 10 years or more. In other words, investors are demanding low risk assets in the challenging Stavanger market. Whilst the other big cities have experienced yield compression of between 0.25 and 0.75 percentage points in the last year, the yield in Stavanger has remained at 6 percent since 2013. The office rental market A report from IRIS (International Research Institute of Stavanger) indicates that about a quarter of the workforce in Rogaland work in the oil industry. In addition, it is estimated that a further 15 percent of jobs are indirectly linked to the industry. As a result, the fall in oil prices has caused unemployment to rise by more than 7,000 persons during the last two years, an increase of 123 percent.* *Source: NAV **Source: EiendomsMegler1 Næringsmegling
New construction activity has declined considerably in the Stavanger region, with only 25,000 m2 of office space per year scheduled for completion in 2015 and 2016. Nevertheless, we assume that the office vacancy rate will continue to rise, as net absorption is lower than the supply growth. Market rents for good premises at Forus is down by about NOK 100 to 150/m2 in 2015, equivalent to about 10 percent.** The correction in prices has been more moderate in central Stavanger. Weak office demand and rising office vacancy levels will probably result in rental prices continuing to fall in 2016.
41 | M2 | www.union.no
Areas
Transactions 7
35
6
30
5
25
4
20
3
15
2
10
1
5
0
2009
2010
2011
2012
2013
2014
2015
Source: UNION
High standard office rents NOK/m2/year 2,800 2,500 2,200 1,900 1,600 1,300 1,000
City centre
Fringe areas
Hinna Park
Forus
Sandnes
Source: EiendomsMegler1 Næringsmegling
0
Number of transactions (right axis) NOK billion
6/ Office rental market in Oslo
“In addition to a moderate new construction volume, an increasing volume of office space is being taken out of the market to be converted for other purposes. We expect zero growth in supply in 2016 and negative supply growth in 2017.”
Office rental market
44 | M2 | SPRING 2016
Supply Zero growth in supply in 2016
Office vacancy in Oslo, Asker and Bærum currently stands at 7.8 percent, having risen by about 100,000 m2 in the last two years. However, the increase in vacancy seems to have leveled out during the second half of 2015, with a vacancy rate at about the same level as in the autumn report. Office vacancy in the western corridor has increased for eight consecutive quarters, with the total increase being 70,000 m2. In other words, the change in vacancy in other areas of Oslo has been very moderate. Office vacancy is highest in Lysaker and Fornebu at around 14 percent. We expect vacancy rates in this area to continue to increase. One of the reasons for this is that Aker Solutions will vacate Snarøyveien 36, when they move into Fornebuporten where construction is being finalized. In addition, demand from tenants in the oil industry will be low in the foreseeable future and it is likely that there will be more layoffs. Since autumn last year, we have revised our new construction estimate down by a total of 60,000 m2 to 225,000 m2 for the period 2016 to 2018. This is equivalent to around 80,000 m2 per year. By comparison, the average volume over the last 15 years has been around 130,000 m2 per year. We expect that the new construction volume in 2016 and 2017 will be about the same as the volume of the projects that are already under construction. However, we expect several additional projects with delivery in 2018 to commence for three reasons: (i) several large tenants have contracts that expire in 2018/19, (ii) new construction projects are profitable at competitive rent levels and (iii) growth in the Norwegian economy is expected to pick up during the period. All in all, we believe that this will enable more developers to succeed in attracting tenants for their new construction projects.
In total, the letting ratio is about 60 percent for new construction that is in progress or that we are sure will be started. This means that these buildings will have a capacity of about 55,000 m2. For example, there is still about 60 percent vacancy in Sundkvartalet, which will be completed early on in the new year, and in Diagonale, which will be occupied by TV 2 in 2018. In addition to a moderate new construction volume, an increasing number of offices are being taken out of the market to be converted for other purposes. Offices are mainly being converted into apartments, but we are also seeing examples of conversion into hotels, schools and asylum reception centres. We estimate that about 200,000 m2 of office space will be removed from the supply side in the period 2016 to 2018. Our estimates imply zero growth in supply in 2016 and negative growth in the office stock in 2017. There are two main factors driving the growing trend of converting offices. Firstly, the strong increase in housing prices in recent years has widened the gap in prices between housing and offices. Secondly, tenants are becoming more demanding with regards to location. Office buildings in less desirable locations are very difficult to let and in many cases make attractive conversion objects. According to our forecast for Oslo, Asker and Bærum, office vacancy has peaked and will stabilise in the coming quarters. We then expect office vacancy to fall, as growth in supply is very low. A low volume of new construction and a significant level of conversion will help balance the market in a challenging period, and pave the way for a fall in vacancy as demand picks up.
45 | M2 | www.union.no
Office rental market
Office vacancy in Oslo, Asker and Bærum 100
9%
75
8%
50
7%
25
6%
0
5%
-25
4%
-50
3% Q4 2011
Q2 2012
Q4 2012
Q2 2013
Q4 2013
Q2 2014
Q4 2014
Q2 2015
Q4 2015E
Q2 2016E
Office vacancy (right axis) Change in office vacancy (´000 m2)
Q4 2016E
Source: UNION
New construction and conversion of office space 350 300 250 200 150 100 Average
50
Conversion 0
Net new construction New construction (´000 m2)
-50 2000
Source: UNION
2002
2004
2006
2008
2010
2012
2014
2016E
2018E
46 | M2 | SPRING 2016
Office rental market
Demand Demand is weaker than employment growth indicates
Norges Bank’s expectations survey was negative for both Q3 and Q4. This is the first time since the financial crisis that the index has been negative, and the level indicates that more companies will be reducing their staffing than companies taking on additional workers in the next 12 months. However, most macroeconomic forecasts suggest that employment growth in Norway will stay positive in 2016. As the downturn in the Norwegian economy has particularly affected the west of the country, employment growth must remain at a relatively strong level in the east if national growth is to be positive in 2016. Net absorption in Oslo, Asker and Bærum was around 30,000 m in 2015, up from -40,000 m2 in 2014. Although employment growth in Oslo is likely to be positive this year, we believe that the net absorption will be zero as many decision-makers are currently affected by the negative sentiment following the oil price decline. We expect demand to increase from 2017 onwards as growth in the Norwegian economy is expected to pick up. 2
If our forecast for 2016 proves right, total growth in demand in the period 2014 to 2016 will be about zero. At the same time, we estimate that the number of office employees will have increased by around 10,000 in the period. This means that the underlying drivers are currently stronger than the level of absorption would suggest.
This may be because many tenants have rented excessively large spaces in the years before, to allow them to grow within their existing capacity. Another possible explaination is that many tenants are playing a waiting game and packing more and more employees into spaces that are actually too small. Lastly, the office space efficiency of existing buildings will improve over time, as new buildings are more efficient, but this is a process that will probably be so slow that it will not significantly impact the market in the short term. The volume of new contracts last year was 560,000 m2, which is an increase of 10 percent from 2014, but 12 percent lower than the average since 2008. The gross take-up is naturally affected by growth in demand in the market, but is also closely related to the expiry of existing leases. As we have previously pointed out, we are currently in a period with low expiry volumes, which has contributed to pushing down the activity. The annual volume of office searches fell in the period 2010 to 2013. The volume rose in 2014 and has continued to recover in 2015. This is in line with our expectations going forward, as the number of leases expiring will increase in the years to come. In 2018 and 2019 there are particularly many large lease contracts expiring, which will likely boost the activity in the market.
47 | M2 | www.union.no
Office rental market
Net new construction, absorption and vacancy 350
9%
300
8%
250
7%
200
6%
150
5%
100
4%
50
3%
0
2%
Net new construction (´000 m2)
-50
1%
Net absorption (´000 m2)
-100
0%
Office vacancy (right axis)
2008
2009
2010
2011
2012
2013
2014
2015
2016E
2017E
2018E
2019E
Source: UNION
Gross take-up 300
900
250
750
200
600
150
450
100
300
50
150
Volume per quarter (‘000 m2)
0
0
12-month rolling (r.a.)
Q4 2008
Q4 2009
Q4 2010
Q4 2011
Q4 2012
Q4 2014
Q4 2015
Source: Arealstatistikk (covering approximately 70-80% of the market)
Q4 2013
48 | M2 | SPRING 2016
Office rental market
Analysis of rent levels Rental growth towards the end of the year
2015 was a challenging year in the rental market. After several years of rental growth, the average rent level in new contracts declined. Average rents in signed contracts were lower in all four quarters of 2015 than in the same quarters of the previous year*. Regardless of how the figures are compiled, contracts entered into indicate that there has been a rental price correction of between 5 and 10 percent since the peak in mid-2014. We expect market rents in Oslo to remain flat in 2016. Office vacancy has topped out and is expected to start declining from 2017. The favourable trend on the supply side means that rental growth may return relatively quickly, and it is our assessment that some areas may start to show rental growth from the end of 2016. According to our forecasts, rents will increase by about 2 percent in 2017 and 5 percent in 2018. There is currently considerable variation in rent level trends between various geographical areas. These differing trends can
*Source: Arealstatistikk
primarily be attributed to three factors: (i) Office vacancy, (ii) completion of new buildings and (iii) oil exposure. The western corridor scores weakly on all these parameters and we estimate that rents have fallen on average by 10 percent in this area. We expect that the negative trend in the oil-heavy areas in the west will continue in 2016. In all probability, there will be new layoffs in the oil industry, resulting in significant “hidden vacancy”. Vacancy levels will also rise significantly in Fornebu when Aker Solutions vacates Snarøyveien 36. A high level of office vacancy, weak demand and increased subleasing activity combine to put pressure on rents. Rental prices in northern, eastern and central areas have been relatively robust during the downturn in the oil industry. We saw rent levels in these areas remain stable or experience only a slight fall during 2015. These areas scored well against all three parameters against which the western corridor performed weakly. In the main, we expect rent levels in these areas to remain stable during 2016.
49 | M2 | www.union.no
Office rental market
Office rents and vacancy 12%
2,400
10%
2,000
8%
1,600
6%
1,200
4%
800
2%
400
Office vacancy
0%
0
Nominal rent (right axis)
2001
2003
2005
2007
2009
2011
2013
2015E
2017E
2019E
Source: UNION
Development in rental prices by area 140
130
120
110
100
Central Oslo Northern and Eastern Oslo Western corridor
90 Q1 2010
Q1 2011
Source: Arealstatistikk, January 2016
Q1 2012
Q1 2013
Q1 2014
Q1 2015
50 | M2 | SPRING 2016
Office rental market
Rental growth forecast Nominal change in market rents
Outer West
Lysaker Asker/Bærum
Fornebu
-4 to -2%
-1 to 2%
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Office rental market
Nydalen Outer North/East
Inner City North
Skøyen
Økern, Hasle, Løren & Ulven
Inner City West
Bryn/Helsfyr City Centre Inner City East
CBD Bjørvika Outer South
Office rental market
52 | M2 | SPRING 2016
Office areas
In the CBD, the office vacancy is 9.7 percent after having risen by almost 5 percentage points during the last year. About 5,300 m2 have been available in Tordenskiolds gate 2, 3,700 m2 in Dronning Mauds gate 15 and 4,500 m2 at Fritjof Nansens plass 4. Carnegie will move from Grundingen 2 to Fjordalléen 16 after signing a new lease for 2,500 m2. Some 2,500 m2 remain available at Fjordalléen, which will be empty once several companies in the Aker system move out in the summer. The vacancy at Olav Vs gate 4 has fallen by about 2,800 m2 as a result of Omsorgsbygg signing new leases with various municipal tenants, whilst Axo Finans has signed a lease with Nordea Liv for Fridtjof Nansens Plass 7. Historically, rents in the CBD have been hardest hit in periods of recession. However, we expect rental prices in the CBD to show a more stable development on this occasion as it is mainly the oil exposed regions which are hit by the downturn in the oil market. Areas with many oil-dependent tenants and areas where new construction activity has been high over the last few years have been hit particularly hard. It is worth noting that office vacancy has risen significantly over the last 12 months. Combined with the fact that several players are planning major renovation projects, there will be a fight for tenants in the future. However, we believe that the CDB product is in demand and we expect rent levels to hold up during 2016. The office vacancy level in the City centre is 6.2 percent, which is a reduction of 0.5 percentage points since autumn last year. Vacancy in the area is about 7 percent if we omit Bjørvika, where there is currently a vacancy level of just under 3 percent. Vacancy in Bjørvika
has halved in the last 12 months. Clear Channel and Norsk Hussopp Forsikring signed leases for a combined total of just over 1,500 m2 in Statoil Fuel and Retail’s new headquarters at Schweigaardsgate 16. In addition, Braathen has sub-let just over 3,500 m2 at Dronning Eufemias gate 16 to Norwegian Hull Club and HR Prosjekt, the latter of which recently sub-let 500 m2 to communications agency Apeland. In the Posthuset building, Entra has recently extended leases with Posten Norge for 9,700 m2 and the Norwegian National Rail Administration for 7,800 m2. Entra also strengthened its position in the area by buying the office section of Oslo City from DNB Livsforsikring during Q4. At the turn of the year, it was announced that TV 2 would relocate from Karl Johans gate 12 to Diagonale in Bjørvika. The TV company will lease a total of 6,000 m2 for a period of 12 years once the new building is completed in 2018. HAV Eiendom and Olav Thon are the developers behind the office project, which will cover an area of around 15,000 m2. Following the signing of several major contracts in Inner City West in Q2 and Q3 last year, the activity has been relatively low. Office vacancy levels in the area have remained stable at around 7 percent in the last year. The vacancy level is moderate in Inner City East, standing at 7.9 percent after having increased by 2.8 percentage points since autumn last year. This increase is entirely attributable to the fact that Sundtkvartalet will become available within 12 months. After Manpower signed a lease for 4,500 m2 before summer last year, about 17,000 m2 is now available in the building, which is due for completion in late 2016/early 2017.
53 | M2 | www.union.no
Office rental market
Rent level per area Rent level (NOK/m2/year)
Prime
High standard
Moderate standard
Vacancy, %
Vacancy 12 months
CBD
4,500
3,800 - 3,300
2,500
9.7%
4.2 -3.0
Bjørvika
3,200
2,700 - 2,300
N/A
2.7%
City Centre
2,900
2,600 - 2,200
1,750
7.2%
1.0
Inner City West
2,800
2,200 - 1,800
1,500
5.3%
-1.8
Inner City North
2,200
1,800 - 1,600
1,250
4.3%
-1.1
Inner City East
2,300
1,700 - 1,500
1,150
8.0%
4.5
Skøyen
2,900
2,600 - 2,300
1,850
8.3%
-2.5
13.3%*
3.1*
Lysaker
2,100
1,700 - 1,500
1,400
Fornebu
1,900
1,600 - 1,400
1,300
Nydalen
2,200
1,900 - 1,600
1,450
6.1%
-2.2
Bryn/Helsfyr
2,100
1,800 - 1,500
1,300
9.0%
-2.7
Outer West
2,100
1,700 - 1,500
1,200
15.5%
-1.2
Økern, Hasle, Løren & Ulven
1,800
1,600 - 1,400
1,350
2.6%
-1.3
Outer North/East
1,700
1,600 - 1,350
1,150
9.3%
0.7
Outer South
1,700
1,550 - 1,300
1,150
5.5%
-1.2
Asker & Bærum
1,900
1,600 - 1,400
1,200
6.9%
0.3
* Vacancy for the combined Lysaker-Fornebu area.
Source: UNION
Office rental market
54 | M2 | SPRING 2016
In Inner City North, the office vacancy level is just over 5 percent, and has remained stable for the last few years. In this area, education institutions’ recent major appetite for space has contributed to keeping vacancy levels low. HiOA, which a couple of years ago leased 10,000 m2 at Stensberggaten 26-28, will be taking over a further 13,000 m2 at Pilestedet 42 once the Office of the Auditor General of Norway moves out towards the end of the year. In autumn last year, university and technical college Noroff signed a lease for 3,500 m2 at Møllerparken 4.
the last report, Volvo Car Norge has signed a lease for 1,500 m2 in a small new building at Snarøyveien 32.
At Skøyen, office vacancy levels have fallen gradually from 10.7 percent in winter last year to 8.2 percent now. The reduction in vacancy is largely attributable to Norwegian Property signing several contracts at Verkstedveien 1 in the last year. There is now only 2,000 m2 available in the 26,000 m2 building. After spending more than a year trawling the market for a new location, NorgesGruppen decided to extend its lease for 14,500 m2 at Karenslyst Allé 12-14 by 5 years.
A high level of office vacancy, weak demand and subleasing activity combined to reduce market rents in the area by more than 10 percent during 2015. We expect rents to continue to decline during 2016, but not to as great an extent as in 2015.
Fram consolidated its strong position in Skøyen by purchasing Sjølystparken from DNB Livsforsikring towards the end of last year. The property is 45,000 m2 , including parking. The office rental market in Skøyen has been negatively affected by the weak trend in the western corridor. This has resulted in a correction of rental prices. However, we believe that rents in Skøyen will stabilise more quickly than in the rest of the western corridor. Lysaker and Fornebu have naturally been hardest hit by the downturn in the office rental market as a large proportion of the tenants in the area are linked to the oil industry. Office vacancy has remained stable at 14 percent since autumn last year, having previously increased for eight consecutive quarters by a combined total of 80,000 m2. We expect office vacancy to continue to rise. One of the reasons for this is that Aker Solutions will probably vacate Snarøyveien 36. Since
In Lysaker, Philip Pedersens vei 20 has been converted into an emergency reception centre for asylum seekers. Oslo Areal has entered into an agreement to lease out the 10,000 m2 building to The Norwegian Directorate of Immigration for the next two years. The company has also signed a lease with the newly established Komplett Bank at Vollsveien 2A.
The office vacancy level in Outer West is just under 3 percent. Well over half of this vacancy is attributable to Selvaag putting 7,000 m2 of Silurveien 2 on the market. At Slemdalsveien 37, 8,000 m2 has been taken out of the market for conversion into housing after the Norwegian Public Service Pension Fund decided to relocate to Verkstedveien 1 in Skøyen. In Asker and Bærum*, office vacancy is “only” 6.9 percent, despite the fact that exposure to the oil industry is relatively high. Several new construction projects are in progress in the area. Towards the end of last year, Ferd Eiendom signed a lease with Indra Navia for 6,000 m2 at Hagaløkkveien 26. Indra Navia, which is a supplier of navigation and telecommunications equipment for airports, is moving from Olaf Helsets vei 6 in Skullerud. The office building will cover a total area of 14,000 m2 and is expected to be completed in December 2017. Before summer of last year it was announced that Attivo would build a new office block of 7,000 m2 in Sandvika (Elias Smiths vei 14-26). In addition, DNV is in the process of extending its headquarters in Høvik with the addition of a new 10,000 m2 office block that is due to be completed towards the end of the year.
55 | M2 | www.union.no
Office rental market
Office vacancy in Nydalen decreased steadily throughout 2015 and currently stands at 6.1 percent, 2.2 percentage points lower than a year ago. This is largely attributable to Avantor being in the process of filling up empty space at Nydalsveien 28. A handful of new leases were signed during Q4. Nydalen continues to be an area that enjoys strong development. Olav Thon will be developing 60,000 m2 of space at Vitaminveien 11, which is located on the lower side of the Storo Storsenter shopping centre. The listed property company will build 150 apartments, a 325 room hotel, a 14 screen cinema as well as a substantial amount of retail and office space. It is planned that the entire development will be completed during Q1 2019. Skanska Commercial Development plans to develop an office block of around 20,000 m2 at Vitaminveien 4. In addition, Avantor will continue its development work on a number of fronts, including completion of a new market space and the development of two new office projects and a residential project at Spikerverket. This major new construction potential obviously places limits on rental growth in the future. However, Nydalen has shown itself to be an area in which demand has been strong enough to warrant a high level of new construction. Since 2010, about 55,000 m2 of new office space has been built, while vacancy levels have been falling. In addition, the market has also absorbed about 20,000 m2 at Nydalsveien 28 following Evry’s decision to move to Fornebu. We believe that this positive trend will continue in the area. In Bryn/Helsfyr, office vacancy is approx. 9 percent, having fallen by one percentage point since autumn last year. There remains 6,000 m2 empty at Strømsveien 96 and 3,000 m2 at Fredrik Selmers vei 4. In addition 7,000 m2 has become available at Grenseveien 88 following COWI’s decision to move to HasleLinje during summer 2016.
Kripos is moving to an 8,200 m2 new building at Nils Hansens vei 25 in mid-2017. Pecunia is the developer for Kripos, which will vacate approx. 12,000 m2 at Brynsalléen 4. Bryn/Helsfyr has a low exposure to the oil industry, and the rental market in the area has remained quite robust during the oil downturn. In Outer North/East as a whole, the office vacancy level is around 11 percent, and has remained relatively stable for some time. In Økern, vacancy stands at around 17 percent**. Lørenvangen 22 was purchased by Selvvaag’s residential division last year, and has been taken out of the market in order to be converted into apartments. There are many strong candidates for residential conversion in the area, something that may force vacancy levels down in the future. OBOS has an important part to play in the further development of the area having bought large parts of Ulven from Storebrand and Fabritius. OBOS aims to build up to 3,000 homes and business premises that will create up to 5,000 jobs in Ulven. As is the case with Bryn/Helsfyr, Outer North/East and Økern have only a limited exposure to the oil industry and we expect that rent levels there will remain stable during 2016.
*Asker & Bærum except Lysaker and Fornebu **Including Hasle, Løren and Ulven
References
Tenant Vollsveien 6, Lysaker UNION handled the leasing on behalf of Aberdeen Eiendomsfond Norge AS. Area: 2,100 m2
Sale Hieronymus Heyerdahlsgate 1, Oslo UNION handled the sale on behalf of the Bendixen family. Area: 13,750 m2
Sale Pontoppidans gate 7, Oslo UNION handled the sale on behalf of City Finansiering AS. Area: 9,050 m2
Tenant Mølleparken 4, Oslo UNION handled the leasing on behalf of Søylen Eiendom AS. Area: 4,400 m2
UNION Gruppen AS CEO Øystein A. Landvik Analysis UNION Norsk Næringsmegling Trond Aslaksen Transactions
Leasing
UNION Eiendomskapital Bjørn Henningsen/Lars Even Moe Investment management
Property management
UNION Corporate Hroar Nilsen Investor service
A complete property house UNION Gruppen is a leading independent operator in the Norwegian commercial property market. Our services include commercial property brokerage, consultation, marketing analyses and valuations, corporate finance and asset management. Our turnover for purchases and sales since 2002 is NOK 52 billion, and in the last six years we have acted as leasing advisor in transactions totalling 700,000 m². On behalf of investors, we manage commercial property estimated at a total value of NOK 11 billion, focusing on active management and value-creating activities. The company is 100% owned by four active partners and has a total of 50 employees.
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