Strong Economy, Fewer Vacancies
Boost Commercial Sector in Paris

When it comes to prime commercial real estate, the City of Lights is unlikely to outshine the City of Big Ben anytime soon. But in the past year or so, Paris's office and warehouse markets have mounted a solid recovery that is poised to improve comparisons with London, its longtime rival just across the English Channel.

One of the world's premier financial centers, London's ritzy West End submarket last year posted prime office rents of about $185.90 a square foot annually compared with Paris's $83.50, according to Property & Portfolio Research Inc., a Boston-based firm. The phenomenal appetite of financial-service firms for London offices helped to push the city of London submarket's demand growth rate, a measure of net new space occupied, to 5.4% in 2006 from the year earlier, above the lower though improving 2.1% rate seen in Paris.

The French economy, however, found its footing following the tech bust and global slowdown that pushed the country's unemployment to 10.1% in 2004. In April, unemployment fell to 8.2%, the lowest rate since 1983, and gross domestic product rose 2.4% in 2006, though still below the 2.8% average for the 13 euro-zone countries, according to Moody's Economy.com.

The region's office vacancies have fallen, office and warehouse rents are edging up though still below previous peaks before the downturn and investors are pouring a record volume of cash into French properties. Investors spent some €23.1 billion ($31.17 billion) on the French real-estate market in 2006, up about 50% from the year earlier, largely driven by property sales in the country's capital region, according to CB Richard Ellis.

Some investors are making big bets on the improving market. In March, a unit of New York-based Lehman Brothers Holdings Inc. and Atemi, a French company, said they agreed to pay about $2.8 billion for the Coeur Défense office complex, which contains nearly two million square feet of office space in the La Défense submarket just outside Paris.

Anne Lemonnier, managing director in Lehman Brothers' real-estate private equity group, says Lehman liked the building's large floor plates as well as Paris's diversified economy and the improving submarket's prospects for higher rents. Though French voters elected President Nicolas Sarkozy after the agreement was reached, Ms. Lemonnier also says the new president's proposed business-friendly overhauls are boosting confidence in the French real-estate market. "There is a kind of feel-good factor in the business community that we didn't have before," says Ms. Lemonnier.

Lower office vacancies are also pushing a measured amount of construction, mostly in submarkets outside the central business district. The French real-estate company Unibail plans to deliver a 68-story office tower in the La Défense submarket in 2012. The curvilinear structure, designed by the California-based architectural firm of Morphosis, is to be topped by wind turbines that generate energy. Southwest of Paris in Issy-les-Moulineaux, new 34,500-square-meter (371,355-square-foot) offices are under construction for Microsoft Corp.'s France unit and its Europe, Middle East and Africa group.

Still, Paris's economy is largely driven by the many multinational French companies with headquarters there. It is less often the location of choice for U.S. and other non-French companies. That could in part be because of France's reputation as a highly regulated business environment, says Paul Guest, chief European economist with Moody's Economy.com. In a recent World Bank study that looked at the ease of doing business in 175 countries, France ranked 35 out of 175 countries while the U.K. took sixth place. (Singapore finished first, New Zealand second and the U.S. third.)

While some hope President Sarkozy will successfully shift the balance, for now London remains Europe's financial capital and lower-cost Dublin and Amsterdam are often winning out as affordable alternative places for businesses to locate in the region, Mr. Guest says. "Should Paris be able to compete with those cities?" he asks. "Yes, in terms of quality of life and culture. But in terms of cost of doing business, it doesn't. Yet."

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