Waiting to Move

Sizing up an economic sector where few reliable statistics are available is never an easy task. When it comes to real estate though, it can be an even more frustrating endeavour given that the force of rumour and speculation often drowns out the relative paucity of regularly reported, objective indicators.
“Booming Properties,” “Lebanese Real Estate on the Verge of a Boom” … “Boom Time Underway” – these are the headlines that crown the public consciousness, even after the “operational pause” of the post-February 14 period.
Indeed, over the past year, the local press has seen so much “Boom,” that one could easily get the impression that the real estate market as a whole is, well, booming across the entire country.
While this may be true for luxury residential and tourism projects, when it comes to office space in Beirut, the reality on the ground is far removed from the over-generalized, over-hyped headlines: Office space has been, and still is, the soft underbelly, the (literally) half-empty core of Beirut’s so-called real estate revival.
And it is this fact, above several other competing indicators, which provides yet another powerful indicator of Lebanon’s deeply rooted economic woes.
“The residential market bottomed out two years ago and is in a phase of expansion while the retail sector is at the latter end of bottoming out,” explained Karim Salameh, who heads up Lebanon’s Eagle One real estate investment fund that was the first, and still only such fund to invest in performing (i.e. already tenanted) office space.
“But the commercial real estate market in Lebanon, from the office market perspective, is still bottoming out due to an oversupply and the lack of vibrant economic activity that would fill that supply fast enough.”
According to Raja Makarem, managing partner for the real estate advisor group RAMCO, Salameh’s overall estimation is right on target.
“There is a great demand for residential projects but we do not see the same demand for office space…Really there is very little demand at the time being.”
According to Makarem, even as prices have dropped precipitously since Solidere began offering its large stock of centrally located, modern office space, demand has failed to pick up mainly because of that all too familiar Lebanese bogeyman: Politics.
“You did have a large amount of office space that came onto the market in Solidere, so prices dropped…from $450 per meter squared to sometimes as low as $150 in some of the top locations. But it is the political climate of the country that has prevented international companies from coming here and taking up the office space that does exists. That’s the big problem”
Of course, as with many aspects of Lebanon’s political-economy, such is not the case in other competing environs of the Middle East.
In fact, in mid-June, Reem Al Mahmood, the general manager of the Dubai International Financial Center (DIFC), told the El Etihad newspaper that the Center had already inked tenancy deals with 41 multi-national financial firms, including heavyweights like Bear Sterns, Merrill Lynch, Standard Chartered Bank, Credit Suisse and Barclays Capital.
More to the point: Fifty companies were awaiting licenses to take up space in the 4 million square feet development, (of which 65% is greenery)
While there are the obvious bright spots in Lebanon mainly centered around Solidere – more than 35 banks, 500 firms and a number of notable multinational companies are already located in the BCD – oft-quoted surveys that suggest Beirut is at the head of the high-end office market in the region fail to really capture the underlying dynamic that characterizes the sector as whole in the city.
“In absolute terms,” explained Michael Dunn of Michael Dunn & Co, “We do not have expensive office space. In London, [office] rents cost approximately $1,200 per meter squared per annum compared to Beirut which is at $250.
“Dubai,” he continued, “is almost double the cost of Beirut and I know that Kuwait has recently seen some big growth.”
Of course, even the $250 figure, which does not include the overall occupancy costs of taxes etc, is deceiving since that figure mostly applies to the best Solidere buildings like An Nahar and Atrium and the few other high-end office developments, like Gefinor in Hamra, that have relatively modern infrastructure (mainly parking, a large floor plate, fire control and telecommunications) to attract and retain major anchor tenants.
“In the old commercial centers of Beirut, in Sin e Fil and Hamra for example,” said Makarem, “where you saw quite a bit of migration when Solidere came with its new stock, most of this old stock is now rented as it was before the War.
“This means,” he added pointedly, “that rents are sometimes as low as $20-30 dollars per meter squared per year.
Not surprisingly under the circumstances, few owners see fit to refurbish their old office stock.
And because pre-1992 leases are set in depreciated Lebanese Pounds, many tenants of office space, even if their company is no longer operational, decide to hold onto their leases, paying, in effect, peanuts each year for tenancy rights.
The vicious cycle means that although occupancy rates may be high in Beirut, the true occupancy rate, as measured by tenanted space and not just rented space, is exerting a significant, market-distorting drag on the economy.
“I can assure you that nothing in Lebanon is 90 percent occupied… An [occupancy] figure more like 55 or 60 percent may, may seem appropriate,” said Salahme.
“Some owners of empty buildings are non-Lebanese who are ill advised,” he explained. “But the main problem is that some tenants, in Hamra for example, date back to the 1960s. Because of the structure of the contracts, these buildings are not attractive investments – the yield is low and it is not possible to evict current tenants.”
On top of all this, some building owners also intentionally keep buildings unoccupied in the hopes of holding out for better rents down the line.
Although, on its face, such a strategy might seem ill-advised, according to Salameh there is generally little rush to enter an already depressed marketplace because many owners are free from the pressures of debt financing arrangements
“Ownership of real estate was not traditionally debt financed so there is little pressure by banks and others to rent out a building.
“You know the American adage,” he added, “that time is money? Well that’s not true here. Its an inefficient marketplace that is also not transparent insofar as sharing information about rentals or having mechanisms for trading properties.”
For Diab Chidiac, fund manager at Middle East Capital Group, all of these complications amount to a clear strategic imperative: Steer clear of investing in office space.
“We are staying out of the office market for now… We just don’t see that there is a real demand because of the slowdown in the economy over the last ten years really.
“There is demand in Solidere,” he added, noting the estimated 350,000 plus square meters of office space already built by the company and the 1.58 million square meters of total office space that will eventually be built out across the BCD. “But it is for a limited amount of modern office space; the demand is just not big enough to allow you to do a fund.”
And indeed, even as bank BEMO announces an HQ projects downtown, and prime buildings like Atrium and Starco near 100 percent capacity, the reality is that across the whole of Solidere, the office occupancy rate stands at just 65 percent.
Although, according to Makarem, that figure has risen by about five percent since the last time his company conducted a survey almost a year and a half ago, the old list of major unoccupied sites hasn’t changed significantly in the intervening months. In fact, of the top 25 largest unoccupied buildings in the BCD, at least 18 still remain unoccupied, representing almost 43,000 square meters of space.
So even though many observers were pleasantly surprised when the initial occupancy rate of almost 60 percent in Solidere was first published, looking back now the figure seems to stand as a sobering reminder of just how far the sector, and Lebanon as whole, must go in order to rebuild the country’s economy.
“Multinationals are just not rushing to Beirut,” said one prominent local economist who asked to remain anonymous.
“And, as we all know, we don’t have a modern set of laws and practices governing the sector… we don’t even have a modern set of indicators which are vital for a functioning market. Add to that the significant economic problems that exist here and you can understand why the office market is underperforming.”