Latin America's Office Sectors Stay Healthy

Office markets are growing at a healthy pace in Latin America, despite the hawkish outlook in the global financial sector, according to a recent report by Prudential Real Estate Investors (PREI).

Absorption continues to exceed new supply in all major markets, producing lower vacancy rates and higher rents. Vacancy rates have trended lower for nearly three years in all major markets.

Good fundamentals have spurred construction activity across the region. The scarcity of space in traditional areas has led to the development of high-end buildings in new business districts such as Las Condes (Santiago, Chile), Puerto Madero (Buenos Aires, Argentina), Marginal (Sao Paulo, Brazil) and Barra (Rio de Janeiro, Brazil). Another alternative for developers has been to retrofit outdated properties in busy downtowns.

Specifically, Mexico City is undergoing an expansion phase, with construction activity concentrated in the Santa Fe, Reforma and Polanco submarkets. Office vacancy rates have declined below 5 percent, leading to the pre-leasing of buildings under construction, a rare event in that market. Developers also are redeveloping existing stock into high-quality assets, which should add space to the class A and A+ inventory.

In Brazil, economic growth has led to record-high absorption and a steady decline in vacancies. In Sao Paulo, for example, the office vacancy rate is just 7.3 percent, according to PREI. The submarket of Marginal has been responsible for the bulk of the absorption, although there is a great deal of activity in the downtown, due to revitalization efforts by the local government.

A number of new projects are in the works in Buenos Aires. Developers were attracted to the city by the declining vacancy rate (now 4.1 percent) and rising rents. However, in part due to the nation’s political unrest, potential tenants prefer to wait until the projects are up before committing to new space.

Chile’s main office market, Santiago, is thriving with the vacancy rate below 1 percent. The Las Condes submarket, which accounts for most of the class-A stock, continues to be the main recipient of new development. New construction in 2008 may not be able keep up with pent-up demand, although large projects that will transform the dynamics of that market are on schedule to be delivered next year.