Nearshore Americas

From Vacancy Rates to Buyer Behavior, Understanding the Real Changes in Real Estate

For more than a year, dust has gathered on the empty desks at offices across the Nearshore region.

Commercial real estate locations from Buenos Aires to Bogotá are bereft of their usual bustle and activity, as recurring breakouts of Covid-19 force companies to keep employees at home.

“We’ve seen total demand shock for office spaces in Costa Rica, Panama and the Central American region,” said Jose González, director of market research and consulting at real estate services firm Cushman & Wakefield.

Jose González, director of market research and consulting at Cushman & Wakefield

“It hit harder than the financial crisis of 2008 and 2009.  It’s something we’ve never seen before. But that doesn’t mean the office is disappearing.” 

Recently, major tech corporations like Google, Facebook and Amazon have announced that they will delay the return to the office until 2022 (and will likely make vaccinations mandatory for those returnees). It’s likely others will follow.

So what does this mean for the real estate market in the Nearshore region? With uncertainty hovering over the return to work and questions of whether the centrality of the office to the life of a corporate will remain in place, we look at the trends that are likely to influence decisions over renting and purchasing space in the Nearshore today and into the immediate future. 

Flight to Quality with Employee Experience in Mind

As companies look around them and try to figure out their next real estate move, many are deciding to reduce their office space requirements ahead of the return in the post-pandemic era. Some are choosing to redevelop their spaces akin to the WeWork model, in the expectation that employees will be splitting time between the home and the office. Hot desks are replacing permanent desk positions while innovation, focus and quiet rooms are becoming more popular.

The market for second-rate offices is being hit. 

Andres Cardona, VP of advisory and transaction services at CBRE Colombia

“At the end of 2020, we saw 90,000m2 of office space being vacated, which is a large amount for a market of 2.5 million meters squared. But at the same time, we had a lot of companies taking up space in new premises in more modern buildings in a flight to quality,” said Andres Cardona, VP of advisory and transaction services at CBRE Colombia.

Aside from the pandemic’s reshuffling and the environmental considerations that can influence companies office selection, employee experience is another factor in the flight to quality. Whereas Class B offices offer basic amenities, Class A and A+ buildings provide enhanced contactless access, ample parking spaces and, in some cases, running tracks. 

“In Costa Rica, Class B buildings may not have had any investment for 20 years. This modernization of inventory in the market is aimed at talent, and attracting and retaining that talent,” González explained.

Real Estate Vacancy Rates to Rise Further?

In the case of Costa Rica, vacancy rates have risen sharply during the pandemic. “Pre-pandemic, the vacancy rate was 12% or less. Now we’re talking 18%. That’s a big rise,” said González.

Once a market’s vacancy rates go above 17%, it is considered to be oversupplied and effectively becomes a ‘buyer’s markets’, meaning that prices drop as landlords competitively seek occupants for their spaces.

“According to our projections, vacancy figures could reach 24% in the next 12 to 18 months,” González added.

As in any market, behaviour is the consequence of multiple factors, as Costa Rica’s commercial real estate situation is no different. While Covid-19 has undoubtedly caused a dip in interest, the commercial market will soon receive a flood of new spaces that will push vacancy rates further before settling.

“There are several important projects currently under development that will soon add a lot of inventory to the market. It’ll add another 100,000m2,” said González.

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This isn’t the case everywhere, however. According to CBRE’s July 2021 Outlook Report, the vacancy rate in Bogotá’s office market will fall from a peak of 13% at the end of this year, to 11% in 2023. The reduction in new projects – falling each years until 2024 – will play a large part in this trend.

However, vacancy rates for Class B buildings have been trending up since 2019. By 2Q 2021, rates had reached 16%, up from just 5% two years earlier, and almost tipping into buyer’s market territory. 

Other markets may see vacancy rates stay higher for longer. One example is Santa Fe, a financial and business district in the west of Mexico City. Though it serves many major global companies, it is a recently redeveloped area and adequate residential and infrastructure services remain a problem there.

“There is a more dramatic situation in Santa Fe,” said Cardona. “At the moment, it has a 50% vacancy rate.”

Companies in the Know to Make Savings

With the dust of the pandemic still not settled, there is a degree of mystery to commercial real estate prices at present, say the experts. 

“Companies that know the market reality have the opportunity to make great business” — Andres Cardona

“Prices per meter haven’t changed, but what has changed is the gap between the asking and the closing price,” said Cardona, speaking about the Colombian market. “It has become wider as a result of the past 18 months, and companies that know the market reality have the opportunity to make great business. Landlords are afraid to have vacant spaces.”

In around 40 US states, real estate closing prices are made public. This isn’t the case in much of Latin America, including Colombia, Costa Rica and Panama. This opaqueness can mean that companies need to look to industry experts to understand the reality on the ground.

“Listing prices in Costa Rice have fallen by about 5% over the past year,” said González. “While the gap between the listing and closing prices can commonly be 7% to 10%, we’re now seeing gaps of between 15%, and, in a couple of cases, 20%.”

Stuttered Return, Depending on Operation

Latin America and the Caribbean’s Nearshore offering tend to evolve around back office services, though the presence of tech-driven services remains on the up. It is these back-office services that are taking longer to return to the office, says González.

“There’s nothing like doing business face-to-face,” González explained. “And front office operations – client facing operations – are returning to the office first.”

“We’re hearing from clients that HR, marketing, financial services and similar functions have produced strong performance indicators from home, so they’ll be held back” — Jose González

Those companies that operate in banking, consulting, architecture and similar industries are seeing a larger part of their workforce returning, he says. But even within those industries, the back office staff will remain at home until the pandemic has – at least mostly – passed.

“We’re hearing from clients that HR, marketing, financial services and similar functions have produced strong performance indicators from home, so they’ll be held back,” he said.

It remains to be seen whether back office staff will ever return to the office full time, or whether the office they return to was the same that they left.

Colombia’s Data Center Market to Boom

The global digital transformation and move from legacy system to the cloud that many companies are undertaking require some serious data center space. Though we may like to think of the cloud as without physical limitations, the reality is that data must be stored somewhere. Andres Cardona says Colombia will be that place. 

“The data center is booming,” said Cardona. “The biggest data center footprint in Colombia has been 7,500m2 up until now. We’re now negotiating with two data centers each of which will be 100,000m2.” 

Colombia’s strategic Nearshore location, a well-placed midpoint between North America and South America is one contributing factor. But so too are the efforts made by Colombian government and public and private institutions in positioning Colombia, including Bogotá and Medellin, as a major tech market in Latin America, rivalling other locations like Buenos Aires and Guadalajara. 

Peter Appleby

Peter is former Managing Editor of Nearshore Americas. Hailing from Liverpool, UK, he is now based in Mexico City. He has several years’ experience covering the business and energy markets in Mexico and the greater Latin American region. If you’d like to share any tips or story ideas, please reach out to him here.

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