The Office Buildings Market in São Paulo: Time cycles to absorb vacant space and to recover investment attractiveness

The office market in São Paulo has been in recession since the year 2000. This situation came up due to two main factors: [i] the very aggressive attitude of developers during the period that comprises the year 1999 until 2000. At that time there was a very strong perception among investors that a new expansion era for new office buildings in São Paulo was about to begin and, moreover the Brazilian economy had started its recovery; [ii] The intense retraction of the Brazilian economy along with the political transition in 2002, which was mainly caused by the deterioration of the expectations in relation to the economic policies that would be performed by the new government.The recovery of the economic activity in the office building market firstly depends on the macroeconomic growth in Brazil and within the São Paulo metropolitan area. On the other hand, the expansion of the activity in the office buildings sector relies not only on the developers’ expectations of how and when the current vacant units will be rented, but also on the potential risk‐return composition of new buildings to be developed in the next years. This paper describes the economic scenario in which investment decisions to build new office buildings for rent in our local market are made and we also simulated both the necessary period of time for investments in the São Paulo office market to recover attractiveness and the time interval for the increase in the occupation rate absorb the actual vacant spaces. These simulations have taken place based on projections for the Brazilian GNP increase and they showed that for an annual increment of 4.5%, in 3 years could be reached both, attractiveness for new investment and occupation of vacant areas. For a 2.0% annual growth, the absorption of vacant spaces will take 4 years from now and new investment would be attractive only in 2012. Besides, we discuss the market prices fluctuations on the inflexion point where the transition from one phase of the real estate cycle (recession‐non attractiveness) to another (recovery‐attractiveness) occurs.