São Paulo: office market on Paulista Avenue recovers with renovation wave

By Juliana Estigarríbia

A symbol of São Paulo, Paulista Avenue used to be the most sought-after corporate district in the capital.

Still, over the decades, it lost its leading role to other regions, notably Faria Lima.

However, a recent movement of investors has recovered part of the relevance of the avenue and surrounding streets as office headquarters in a wave of revitalization – the retrofit – of buildings that increases the value of the properties and, in some cases, doubles the price of the square meter.

According to a survey by global consulting company Jones Lang LaSalle (JLL), requested by Bloomberg Línea, 15.6% of the total stock in the Paulista region – approximately 170,000 m² – was retrofitted.

Of the high-standard properties (AA and A, in the consulting company’s terminology), 35% underwent the process.

The financial sector is the most relevant in the space occupied.

The ten largest companies – half of the financial sector – represent 30% of the total area occupied in the region.

According to JLL office rent director Yara Matsuyama, there is an increase in the square meter value of buildings that went through retrofit in the Paulista Avenue region.

The case of a greater increase, according to JLL’s survey, was verified in the Bravo Paulista building, located on Alameda Santos near Trianon Park.

The building was bought in 2020 by a real estate fund (RCRB11) from the manager Rio Bravo Investimentos.

After the retrofit, the square meter price increased from R$55 to R$130.

Today, this value is around R$100, according to the consulting company.

“The retrofit in the Avenida Paulista region aims to bring new technologies to older buildings, within what is possible.”

“It is an important axis, with easy access to the entire city. We see many companies interested in this network”, said Matsuyama.

According to the survey, there was also an increase in the square meter value of the Martiniano de Carvalho building, owned by a real estate fund from Credit Suisse (CSHG): the price went from R$70 to R$90 after the renovation.

Currently, the square meter is R$95.

Also, at Alameda Santos, parallel to Paulista Avenue to the Jardins side, the square meter of the 2477 building had a price increase from R$75 to R$100 the square meter after the retrofit.

The building is owned by São Carlos Empreendimentos, a company controlled by the families of billionaires Jorge Paulo Lemann, Marcel Telles, and Carlos Alberto Sicupira.

JLL also pointed out that the Brazilian Financial Center, owned by BTG Pactual’s real estate fund BRCR11, obtained an upgrade in its rating after the retrofit process.

The building, known in the past as the headquarters of the former Banco Real (acquired by Santander), now houses tenants such as CNN Brasil and WeWork, as well as Banco Pan, among others.

“There are cases in which it is possible to bring the building up to date with the retrofit, which ends up being a differential, such as Brazilian Financial, which is in great demand,” said João Toazza, partner and manager of Hedge Investments, one of the largest real estate fund managers in the country.

According to Maximo Lima, CEO of HSI, a real estate fund manager with operations in real estate, Avenida Paulista, despite its generally older buildings, presents a competitive advantage over other regions with a large concentration of offices.

“Faria Lima has nothing, only a bike lane and a lot of traffic. And it is the most valued in São Paulo.”

According to the manager, Paulista’s strong point is the abundant supply of subway.

There are five stations and three different lines in its extension, bus lines, and the relatively central location.

Depending on the activity exercised by the tenant, he pointed out, it is an adequate region.

“Investors still like Paulista also because it has a certain stability: the rent doesn’t skyrocket but also doesn’t plummet in times of crisis”, he affirmed.

According to HSI’s CEO, the region works efficiently for investors seeking income without major “scares”.

CHALLENGES: THE COSTS

The wave of the revitalization of commercial buildings in the Paulista region often goes beyond the façade.

The partner and manager of Alianza, a real estate fund manager, Fábio Carvalho, said there are many old buildings, with outdated electric, hydraulic and air-conditioning structures, besides having lower ceiling height than in more recent constructions and, therefore, considered modern.

“Paulista’s enterprises have difficulty competing with Faria Lima’s and Itaim’s as a whole”, affirmed the manager.

According to him, another obstacle is the elevation in the last years of construction costs, which demands from investors even more significant amounts for renovation or development of new enterprises, not to mention the capital cost increase.

“It would take a long time to get the return,” he said.

Matsuyama said that the corporate buildings in the Paulista region were conceived in a time of great relevance attributed to property, which led to a great pulverization of building properties.

This means “it is difficult to get a majority to approve a retrofit”.

According to the executive, most projects in the Paulista region have an old construction standard, with items considered inefficient, such as outdated elevators.

“The big challenge is to work on modernizing a building from the mid-1970s and guarantee a viable retrofit cost to maintain or increase the rental value. The cost has to be worth it.”

There are cases where this happens with full ownership of the building.

Toazza, from Hedge, said that a residential building in Alameda Santos owned by the Hedge Office Income FII fund was 100% transformed into a commercial after a developer was willing to buy unit after unit until it obtained the whole building.

“As soon as this project was finished, it was 100% leased to a top law firm, which renewed the contract for another seven years in 2022, because there was no other alternative building with that. There take available in the Paulista region,” said the executive.

FARIA LIMA: REDUCED VACANCY LEADS TO ‘MIGRATION’

According to JLL, the average vacancy in the Paulista region is around 14.5%.

“It is a balanced level, with available options. If there is less offer, a movement of price increase starts”, said Matsuyama.

That’s what has been happening in Faria Lima for a long time.

The vacancy level, according to JLL, is 4.5% in the region, with a square meter of around R$250.

It results from a combination of a highly demanded region with low new supply – the best offices are occupied.

In this scenario, HSI’s CEO said he believes in a migration movement from Faria Lima to nearby regions, such as the neighborhoods of Avenida Rebouças and Largo da Batata, in the Pinheiros district, example.

“These regions will end up benefiting,” said Lima.

The manager said that Faria Lima and Chucri Zaidan’s history, the office axis in the south zone of São Paulo capital, is a differential concerning Avenida Paulista.

These two regions have developed with corporate buildings of professional owners, basically investment funds, which means that they program periodical capex for the renovation of the enterprises.

“These buildings tend to age better. Some on Paulista Avenue don’t need only a facelift but a new beginning.”

“Only retrofit will not help to raise the value of the square meter.”

With information from Bloomberg