Office space in Chile's capital Santiago to hit record levels

Billionaire Horst Paulmann began developing South America's tallest tower in 2006, when economic expansion fuelled by copper demand pushed Santiago office rents to a six-year high. He's completing it as vacancies soar.

The retail magnate's 62-floor Torre Gran Santiago in the city's financial hub is part of a record amount of office space about to flood the market. Santiago developers, in an effort to fill the new buildings, were sweetening terms for tenants with such perks as six months of free rent, double the norm, or by helping pay for improvements that usually were the responsibility of occupants, according to brokerage CBRE.

"The winners will be those that react first and offer incentives to lock in renters," said Marc Royer, director of the capital markets division in Santiago for CBRE. "Some companies are starting to defer their decisions to rent new offices, to see if they can negotiate better terms."

Office vacancies in the Chilean capital were expected to climb to 11 per cent in 2014 from a projected 6.6 per cent at the end of this year as the flood of newly built space became available for rent, according to CBRE. Just two years ago, the vacancy rate was less than 2 per cent following a dearth of construction.

About 850,000 square metres of new space was slated to come to market in the next two years, boosting the city's office supply by almost a fourth, the brokerage said. The upscale areas of El Golf, Vitacura and Nueva Las Condes may fare the best as purchases of top-tier, or Class A, office buildings by insurance companies and investment funds, along with postponed construction plans by some developers, stave off rent declines.

Office landlords in Providencia and downtown Santiago may be less lucky as tenants vacate older offices and move into new developments. In those municipalities, where most new projects were lower-quality Class B buildings, occupancies and rents may fall, said Augusto Rodriguez, who manages about US$1 billion of real estate investment assets for Grupo BTG Pactual in Chile.

"The effect will be felt much harder in the B-level office market, where vacancy rates could shoot up to 15 per cent," he said. "If there's an adjustment in rent prices, it will be in the B level, not in the A-level buildings."

Office buildings considered A grade had open floor plans of at least 400 square metres and ceilings at least 2.5 metres high, and were less than 25 years old, according to Colliers International. Class B buildings had open plans of at least 150 square metres and 2.3-metre ceilings, and were less than 40 years old.

"Those in Providencia, they are the ones in trouble," said Alejandro Fernandez, a broker at Santiago-based real estate brokerage P&G Larrain.

Fernandez is in charge of renting out the 44,822 square metre, 22-floor Genesis office building project in neighbouring Las Condes district. The development, which has yet to move beyond the digging of its foundation, already has tenants for more than 60 per cent of its space.

"I've noticed some more people approaching and asking about discounts, but I'm turning them away," Fernandez said.

This year, a record 18 new top-tier office buildings were scheduled in Santiago, a city of seven million, according to Contract Workplaces, an office-space refurbishment and consulting firm. That's up from 10 last year and five in 2011. Before that, the average was three annually, prior to the surge in development driven by economic growth.

"At a first glance, it may seem too much," said Victor Feingold, regional director at Contract Workplaces. "But in a healthy economy like Chile's, you see a migration related to the quality of the buildings. The bigger companies fill in the space of the new premium buildings, because of the status they gain, and the space they leave usually gets filled up by smaller service firms or the companies that couldn't afford them before."

Gross domestic product expansion in Latin America's wealthiest country is likely to slow to between 4 and 5 per cent next year. Growth may be as little as 3.5 per cent.

Aside from the 300-metre octagonal Torre Gran Santiago tower, Costanera Centre also has a 200,000 square metre shopping mall and three smaller office buildings. The project is coming online in stages - the mall opened in June 2012, while development of the 73,500 square metre skyscraper and an adjacent 17,000 square metre office building continues. Construction of two additional 32-floor buildings, which will include a five-star hotel, is planned for future stages.

Cencosud doesn't have a date set for the Gran Santiago tower's opening because the company is still working with officials from Providencia - the tower straddles the border of that municipality and Las Condes, two of the city's wealthiest districts - on ways to mitigate potential traffic jams.

"We plan to begin the marketing phase by the end of this year and will have a more precise date for the actual opening by then," the company said in the e-mail. While there are preliminary agreements with "world-renowned companies," no leases have been signed for space in the tower, Cencosud said.

Across from Costanera, at the edge of the Mapocho river, is Parque Titanium, a project with three 23-floor towers that have 53,960 square metres of office space scheduled to come to market next year. One tower will be the headquarters of Empresa Nacional de Telecomunicaciones SA, Chile's second-largest mobile-phone operator.

The flood of new office space was not a concern, said Christian Goebel, executive vice-president of Munich-based asset manager GLL Real Estate Partners, which bought a building in the Parque Titanium project last year for an amount he would not disclose.

"We have to differentiate by submarkets," he said in a telephone interview from Munich. "As long as we buy in the best locations, we can reduce vacancy risks. The best markets will always have the best rates."

GLL, which has invested about US$250 million in real estate assets in Latin America, also bought the 21-floor Territoria El Bosque office building in Santiago for more than US$90 million in July, according to Diario Financiero. "We like Santiago because it's a transparent market," Goebel said. "There's a lot of liquidity in the local market and Chile provides a transparent and safe legal system."