AIRPORT OFFICE DEVELOPMENTS: ASSESSING THE POTENTIAL FOR NEW SCHEMES By Zachary Gauge, Researcher, EMEA Research & Consulting

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1 CBRE EMEA ViewPoint July 213 AIRPORT OFFICE DEVELOPMENTS: ASSESSING THE POTENTIAL FOR NEW SCHEMES By Zachary Gauge, Researcher, EMEA Research & Consulting OVERVIEW Plans have emerged in recent years for major office-led commercial developments on the site and surrounding land of a number of medium sized European airports. To assess the potential market for these schemes, some of Europe s established airport office markets are examined to identify the key trends which drive airport office markets. Market conditions in most European peripheral submarkets have been challenging in recent years, but some have proved to be more robust than others in attracting demand during the difficult period. Although the airport markets are driven by varying dynamics, there are some notable general features of the markets which are integral to their relative performance during this period. The presence, or absence, of these features in specific cases is therefore likely to have a significant bearing on the new schemes success in attracting occupiers. One of the key advantages of occupying office space around an airport is the global connectivity of the airport itself, particularly for multinational companies. However, of equal attraction is the level of connectivity to the local and regional economy that is facilitated by the airport infrastructure, as it is the existing local occupiers which form the basis of demand for airport office space. A key determinant of success in this aspect is the level of representation from companies within the target sectors for the airport market which are already operating within the local economy. To attract these tenants, it is important that the airport market is able to provide high quality office space, which will facilitate a working environment which is suitable for the target tenants and attractive for potential employees, in addition to being well integrated into the infrastructure to fully benefit from the connections available in the airport area. INTRODUCTION: A BACKGROUND TO EUROPEAN AIRPORT MARKETS Airport office submarkets have been a feature of a number of larger European cities since the late 198s, when the growth in popularity of well connected, campus style business park office space resulted in major office developments around some of Europe s biggest airports. The occupier profile in office space located on, or in close proximity to, a major international airport tends to be fairly distinctive, with most companies falling into two clear categories. The first is self explanatory and is comprised of companies which are directly related to activity at the airport, such as airlines and travel services providers. The majority of airport occupiers fall into the second category, which is multinational companies that benefit from locating close to an international airport due to the excellent connections to global and local markets. There are two dominant sectors within this category Technology & Telecoms (T&T) and manufacturing. Due, in part at least, to the higher availability and lower cost of land in these areas, rents for space around airports are in almost all cases significantly lower than prime rents in the city. Hence, during the 198s and 199s a large number of multinational companies who are not tied to city centre locations set up office operations at business parks around airports. These locations provide stand-alone buildings, with large efficient floor plates in an attractive landscaped environment with high specification and excellent global connectivity, for a rent which would typically be 3% - 7% less than prime city centre locations. The chart overleaf shows the profile of major office occupiers, situated both on the airport site and the surrounding hinterland, at 14 major European airports based on the total number of companies from each sector Airports: Frankfurt, London Heathrow, Paris CDG, Amsterdam, Barcelona, Berlin, Brussels, Madrid, Manchester, Milan, Paris, Vienna, Zurich

2 July 213 EMEA ViewPoint European airports occupier profile Banking & Finance 1% Page 2. Logistics Media 3% 5% Business Services 12% Travel 9% Energy 2% Public 2% T&T 29% Manufacturing 28% The table below shows some of the larger transactions which have been agreed in airport locations since 211. These indicate that the profile of demand has remained broadly in line with the established occupational profile, with a high presence of multinational firms from the manufacturing and T&T sectors, in addition to a number of transactions to companies within the aviation industry. Recent transactions around European airports AIRPORT COMPANY SECTOR SQM Amsterdam Fluor Engineering 2, Amsterdam Cargill Manufacturing 8, Amsterdam Bluewater Manufacturing 7,4 Amsterdam Alcatel Lucent T&T 7, Barcelona Puig Manufacturing 15, Barcelona Corporacion Orizonia Travel 5,2 Brussels Levi Strauss Manufacturing 5,8 Brussels ING Bank Banking 5,4 Frankfurt Lufthansa Travel 18,5 Frankfurt DB Schenker Logistics 1,8 London HW IMG Worldwide Media 1,6 London HW BP Energy 7,5 London HW Hasbro Manufacturing 4,6 Madrid Indra Sistemas T&T 8,3 Paris CDG Servair Travel 5,5 Paris CDG Computacenter T&T 7,8 Paris CDG Air France Travel 9, Paris CDG Volkswagen Manufacturing 9,5 Transaction sizes around airports vary greatly, but an analysis of the size of deals to different sectors reveals a notable trend. The largest deals recorded at airports will typically be around the 2, sq m mark. These will generally be to very large companies from the travel industry, who will be using this space as their global HQ. Examples include Lufthansa taking 18,5 sq m at Frankfurt Airport in 211 and Heathrow Airport Holdings (formerly BAA), who occupied 19, sq m at London Heathrow in 27. Aside from the travel industry, the larger deals will tend to be between 5, 1, sq m. Again this is a reflection of the type of space required these transactions will typically come from T&T and manufacturing firms, operating national or regional HQ operations, rather than their global HQ. Market conditions in the majority of non-central business districts, including airport locations, have been challenging during the economic downturn. However some airport markets have performed notably better than others during this period, and when comparing trends at some of the larger existing airport office markets, three key general features emerge which appear to be important drivers of their relative performance; 1. Connectivity to other major global cities and to the local economy the airport is situated in. 2. Prominence of existing occupiers from the target sectors for the market within the regional area. 3. Supply and location of high quality office space suitable for the target sectors. There are plans for major office-led commercial development at a number of mid-sized European airports, where airport stakeholders are seeking to utilise the surplus land on, and surrounding the airport site. The largest of these are at Berlin Brandenburg, Manchester, Warsaw and Stockholm airports, and it is likely the presence, or absence, of these features will have a significant influence on their ability to attract the necessary levels of demand to make the schemes viable. DEMAND SKEWED TOWARDS HIGH QUALITY OFFICE SPACE An airport market is a fairly loose definition, since much of the space is comprised of business parks located slightly away from the airport site. As an airport will have a wide spectrum of influence, different markets have varying definitions on the market boundaries. As the size of the markets varies considerably, a direct comparison of take-up levels is not necessarily indicative of their relative performance.

3 February 212 July 213 To provide a comparative illustration of levels of demand in the markets relative to their size, the average annual take-up volume between as a percentage of the airport market stock is shown below. Average annual take-up as % of total stock (29-212) Take-up (% of stock) Total Stock ('s Sq M) The German markets at Dusseldorf and Frankfurt airports have recorded the strongest performance relative to their size, which is partly attributable to the comparative strength of the German economy during this period. However, it is also significant that the economic regions the airports are situated in have a strong presence of companies from the target sectors for airport markets. Although some demand for office space around an airport will be created by attracting businesses from abroad, or a different region, this tends to account for a relatively small proportion of the demand necessary to drive the market. The main pool of potential occupiers for an airport office scheme will originate from within the local economy, so it is advantageous to be located in a region where there is a strong presence of companies from target sectors for the market. This was the basis for the Airport City scheme at Dusseldorf Airport, a major office development located within walking distance of the terminal building. The strong economic fundamentals of the region there is a high representation of pharmaceutical and T&T firms in the Rhine-Ruhr region and 9 of the 3 Dax-listed companies have their headquarters in the Dusseldorf area provided a large pool of potential occupiers for the new scheme. The airport development has been 2,5 2, 1,5 1, 5 successful in attracting demand from existing local occupiers in the target sectors, with notable organisations including Siemens, VDI and Radprax taking space at the scheme. To attract tenants from competing business locations within a city, the airport market clearly needs to provide office space which is suitable and desirable for their target sectors, at a competitive rent. Part of the reason the Frankfurt and Dusseldorf Airport markets have been more successful than others in attracting demand during the economic downturn is because they are the only two markets which saw any significant speculative office completions during this period. In recent years, demand for office space in Europe has been heavily skewed to high quality office space which provides an opportunity for occupiers to reduce real estate costs by improving efficiencies in areas such as energy costs and advanced workplace strategies which can only be implemented in modern buildings. For example, in 211 a high profile office development at Frankfurt Airport, The Squaire, was successful in attracting accountants KPMG, who selected the building to consolidate their operations from a number of office locations in city. The company cited the scheme s excellent transport connections for both their employees and clients, and its capacity to meet their advanced requirements for modern and communication enhancing real estate as the main reasons behind the building selection. As occupier demand has shifted towards modern, efficient buildings, demand for secondary quality office space, particularly in non-central submarkets, has been very weak. The absence of suitable prime buildings for occupier requirements has had a negative impact on demand levels in many peripheral business areas, including the airport markets. POLARISED VACANCY RATES As companies have upgraded to better quality buildings, they have left behind second hand space which is difficult to reoccupy in current market conditions. With very little speculative development coming through to replenish the levels of high quality space, the profile of available space in many peripheral European submarkets has deteriorated in recent years. Office supply in a number of the established airport markets in Europe is now dominated by relatively modern grade B space, much of which was developed during the dot-com boom in the mid-late 199s, which is too young to renovate yet not modern enough to compete with new and more efficient office space. EMEA ViewPoint Page 3.

4 July 213 EMEA ViewPoint Furthermore, in recent years there has been a growing trend amongst occupiers to centralise their office operations in a number of European markets. One of the prominent drivers of this trend is the reduced rental levels in central areas, which has broadened their appeal to occupiers who had traditionally been restricted to cheaper, peripheral business locations. This is particularly apparent in markets such as Madrid and Barcelona, where prime city centre rental values have fallen by nearly 4% from their pre-recession peak. Central and airport vacancy rates, Q4 212 Page Central Airport But perhaps the most significant trend for airport submarkets given the prominence of T&T companies within their historic demand profile, is the increasing tendency for firms from this sector to locate in central urban districts. CASE STUDY: NOKIA AND PADDINGTON In 211, in response to a declining market share of mobile phone sales against competitors such as Google s Android and Apple s iphone, Nokia underwent a global restructuring which was to include the loss of 4, jobs globally of which 7 were in the UK. THE IMPACT OF THE T&T LABOUR MARKET ON AIRPORT OFFICE SCHEMES In recent years a shortage of suitable labour for T&T companies has emerged in the developed markets as the sector has expanded rapidly to meet consumer demand for new high-tech products, such as smart phones and tablet computers, as well as new opportunities created by the development and rapid diffusion of new systems, such as cloud computing. Employment in T&T operations has expanded by 3.8% per annum over the past five years in Europe, compared to less than.5% per annum for total employment. A recent study conducted by EU Skills Panorama highlighted a significant mismatch in the demand for STEM (Science, Technology, Engineering and Maths) graduates from T&T companies, and the supply of this labour across a number of Tier 1 European cities. The shortage of, and high competition for, suitable labour within the sector has placed increased pressure on CRE decision makers to prioritise labour availability in their real estate decisions. Companies within the sector are acutely aware of the importance of attracting, and retaining the best talent within a knowledge-based industry. CBRE s 212 European Occupier Survey revealed that 67% of T&T occupiers surveyed indicated that the attraction and retention of key talent was the primary driver of location choice, compared to just over 5% for the sample as a whole. Location and building selection within the T&T sector is being increasingly based on the perceived expectations of a young and creative workforce, with occupiers favouring stimulating and amenity-rich environments. Significantly for airport office markets, this has resulted in a shift of demand away from peripheral campus style business and science parks, where T&T firms have traditionally located, to more fashionable urban locations, such as Tech City in London s Shoreditch, to compete within the jobs market by appealing to the needs and aspirations of their target workforce. As part of the restructuring the company closed its large head office campus in Farnborough, located around 3 miles south-east of central London with the intention of downsizing to a smaller building. The company considered alternative office locations around the M25 motorway, one of which was Stockley Park a major business park located to the north east of Heathrow Airport. However, a decision was made to move to 5,5 sq m of office space at Paddington, on the central London fringe, where other telecoms companies including Vodafone and EE are based. Although the company was on a cost-cutting rationalisation program, they were prepared to pay a significantly higher rent to locate in a central area, than they would have paid for a similar size and quality of space at Stockley Park. It was recognised that to remain competitive within their market, they needed to improve the calibre of staff at the firm, and relocating to a more expensive central location was deemed to be a necessary cost to achieve this aim. Source: The Independent

5 February 212 July 213 To respond to the growing competition from central business areas for T&T occupiers, airport office schemes will need to adapt to the new expectations of the tenants and their employees. The quality and style of office buildings will need to match their requirements and aspirations by providing technologically advanced workspace which can facilitate modern working styles within an atmosphere which encourages creative thinking and collaboration. Furthermore, the buildings need to be developed within a setting which resembles a town centre working environment, by providing the high levels of amenities and social interaction opportunities desired by the young workforce the sector needs to attract. If CRE decision makers within the sector take the view that the scheme will lack the stimulus required to appeal to their target workforce, this will have a detrimental impact on demand levels. CONNECTIVITY AND RENTAL VALUES The highest rents are achieved at Frankfurt and Amsterdam, which are both large hub airports and have a broad range of flights to key global destinations. This is reflected in the profile of the companies located in the area Microsoft have their European HQ at Schiphol which has a daily direct flight to their US HQ in Seattle, whilst some of the occupiers around Frankfurt Airport originate from a range of global destinations which are served by a daily direct flights from the airport. These include technology companies such as Oracle (San Francisco), Nintendo (Kyoto) and BMC Software (Houston). However Paris CDG and London Heathrow airports are the two largest in Europe in terms of passenger numbers and destinations served, yet the office rents achieved here are lower than Frankfurt and Amsterdam, despite occupancy costs in the cities generally being higher. Prime airport and city rents ( /Sq m/annum) EMEA ViewPoint The global connections at an airport are of particular significance to multinational firms based outside Europe. There is a particularly high presence of these companies from T&T and manufacturing firms the chart below illustrates that over half of the key occupiers from these sectors located around major European airports originate from outside Europe. Country of origin of key European airport occupiers Prime city rent Prime airport rent Airport rents as % of city rents 1,4 12% 1,2 1% 1, 8% 8 6% 6 4 4% 2 2% Spain, 4% Other non- European, 5% Netherlands, 3% % France, 6% UK, 7% US, 41% Other European, 7% Japan, 1% Germany, 14% Of the non-european companies, over 7% were located around an airport which had direct flights to the city of their global HQ. For large multinational companies, the provision of direct flights to other key office locations will clearly be a major pull factor to an airport area. This can be in part explained by the quality, proximity and location of office space which is available at the airports, and significantly, how well the office buildings are integrated into the airport infrastructure. Of equal importance to the global connectivity provided at the airport itself, is the level and quality of connections to the local economy, which is the main source of occupier demand and labour for the market. In addition to having a quick transfer time to the city centre (1-15 minutes by train), Amsterdam and Frankfurt airports are connected to the high speed national, and international rail networks providing connections to the surrounding region and other major cities. Page 5

6 July 213 EMEA ViewPoint Distance and time from airport to centre Distance to city centre (kms) 7 Time to city centre (mins on train) tend to be the dominant business centre within the wider area, and have less competition from nearby town centre markets as Heathrow and Paris CDG. Furthermore, the prime office space is well integrated to the facilities and amenities at the airports, and can be accessed to the terminal building by foot. The impact this can have on achievable rents at an airport office scheme is demonstrated by two different markets at Amsterdam Schiphol Airport Source: National Transport Websites By contrast, transfer times from Paris CDG and London Heathrow airports to the city centre are significantly longer. Although both airports have a direct train which connects to the city in 15 minutes (London) and 22 minutes (Paris), this only goes to the fringe of the city centre Paddington Station and Gare du Nord, where additional connections are required to get to the CBD. A further explanation for the variation in prime rents is the location of the office space which is available at the different airport markets. Partly due to the size of the airports, and additional pressures on land use around the perimeter, there have been limited opportunities for office developments close to or on the airport site at Heathrow and Paris CDG. Office developments have therefore had to be focused in business parks, a few kilometres from the airport site. The Schiphol centre market is comprised of a number of modern, corporate style office buildings located within easy walking distance of the airport terminal and which, in the case of the World Trade Centre development, can be reached indoors. Vacancy in this location is lower than the overall city rate and demand is strong, as in addition to attracting traditional airport occupiers such as KLM and Microsoft a number of firms from the banking and finance sectors such as Deutsche Hypo Bank, Unibail-Rodamco and CBRE Global Investors are located here. Accordingly, prime rents for space at the World Trade Centre can achieve 365/sq m/annum higher than rents on prime CBD buildings. A stark contrast to the Schiphol centre market is Schiphol Rijik, a large office park situated to the south east of the airport. The park is well landscaped and the office space is modern and generally a very high standard. However, the park is severely disadvantaged due to its location the office complexes are not very visible and access to the area, both by car and public transport, is not optimal. As a result, the park suffers from a vacancy rate of nearly 4%, and prime rents are around 6% less than those achieved at the World Trade Centre. These business parks face competition from surrounding suburban town centres, which have also developed their own office markets supported by the good connections available in the area. Examples of these locations around Heathrow include Staines, Uxbridge and Maidenhead, which have been able to attract major global corporations such as Coca- Cola, Kraft Foods and Johnson & Johnson. These locations benefit from a similar level of connectivity as the rival business parks close to the airport, but have the advantage of providing a range of amenities from the town centre environment. Conversely, office developments at Dusseldorf, Amsterdam and Frankfurt are closer to the core city centre, and more integrated into the surrounding area and the airport infrastructure. These markets The World Trade Centre at Schiphol with the terminal building in the background Page 6

7 February 212 July 213 CONCLUSION Most airport office markets, as with other peripheral European submarkets, have struggled to attract demand during recent years as a combination of heightened competition from central locations, and a lack of suitable high quality space for occupiers, has negatively affected the markets. This impact has been particularly pronounced on airport markets due to the prominence of the T&T sector, which has seen a marked shift in demand behaviour towards central urban districts. It is likely the traditional 198s/199s business park style office space will struggle to attract new occupiers to the market, as occupiers increasingly demand better quality high specification office buildings. However, the divergence in performance between the different airport markets does indicate there is positive scope for future schemes around airport sites, if the developments can adapt to the changing needs and aspirations of the target sectors. Encouragingly, demand for newer, well integrated office schemes, such as those developed at Frankfurt and Dusseldorf airports, has been fairly robust in recent years. If the new schemes are able to respond to the changing expectations and aspirations of their target occupiers, and model developments on the more successful schemes at the existing airports, they will be a strong position to compete for tenants from rival business districts owing to the excellent levels of connectivity in the airport area. However, to compete with more central business locations, it is fundamental that any new schemes convey an appropriate modern image. In contrast to a traditional, isolated business park environment, new airport schemes need to provide a mixed use business zone where offices are developed alongside retail and recreational space to create a working environment which appeals to the new expectations of the target tenants, and their workforce. EMEA ViewPoint Page 7

8 July 213 EMEA ViewPoint Page 8 CBRE GLOBAL RESEARCH AND CONSULTING This report was prepared by the CBRE EMEA Research Team which forms part of CBRE Global Research and Consulting a network of preeminent researchers and consultants who collaborate to provide real estate market research, econometric forecasting and consulting solutions to real estate investors and occupiers around the globe. For more information regarding this ViewPoint, please contact: Zachary Gauge Researcher, EMEA Research Henrietta House Henrietta Place London W1G NB t: e: zachary.gauge@cbre.com Cris Tollast Managing Director, EMEA Office Agency & Tenant Representation St Martin s Court 1 Paternoster Row London EC4M 7HP t: e: cris.tollast@cbre.com Richard Holberton Director, EMEA Research Henrietta House Henrietta Place London W1G NB t: e: richard.holberton@cbre.com Marc Reboux Senior Director, EMEA Office Agency & Tenant Representation St Martin s Court 1 Paternoster Row London EC4M 7HP t: e: marc.reboux@cbre.com