In the third quarter of 2004, Spain’s GDP grew 2.6%, and this rate continued into Q4. Capital investment and consumer expenditure have both remained strong, with growth rates reaching 5.9% and 3.4% respectively. The construction sector remains firm, especially due to the residential market. In the services sector, employment grew by 400,000 across Spain during 2004. The country’s unemployment rate fell from 11.2% to 10.5% in Q3. In Madrid, the unemployment rate fell to 6.2% in Q3, the lowest level since 1977, though it moved up again to 6.6% in Q4. In the services sector, employment increased by 8,600 people in Q3, but then decreased by 8,100 people in Q4.
The least attractive indicator in the Spanish economy is still the inflation rate, which has moved up from 2.1% in March 2004 to 3.6% in October. The rate then fell the following months, and reached 3.2% at the year-end.
The commercial property market across Spain has shown positive growth across all sectors in 2004; however it was the industrial sector, traditionally the most stable, which has performed the best. Rents, and especially warehouse and industrial land prices, have increased considerably, and demand in the logistics sector has been more robust and dynamic compared to previous years.
The importance of Spain as a distribution centre for goods to the Mediterranean region as well as South America has had an impact on the logistics sector, which has grown substantially during recent years. The Spanish state has also acknowledged the importance of the logistics sector to economic growth and has committed to several schemes, including the expansion of maritime ports (Free Zones in Barcelona and Valencia), improvements to the Coslada dry dock in Madrid, as well as expanding the cargo capacities of Madrid – Barajas and Barcelona – El Prat airports.
Distribution and storage companies are increasingly active in the occupier market, mainly due to the higher demand for consumer goods in the region. As an alternative to renting or purchasing their own logistics space, companies are also considering outsourcing more logistics and distribution functions to specialised third-party operators, which in turn has had an impact on demand for logistics space.
Given the low interest rates and reduced financing costs, many small occupiers have chosen to purchase warehouses instead of renting them. Family-run businesses are also investing in warehouses due to the favourable financial conditions as well as for growth prospects in capital values over the medium term.
This year is expected to be another good one for the logistics market, with demand for industrial and logistics space expected to remain buoyant given the growth prospects for the sector and general positive economic outlook.
Occupiers and investors will continue to demand freehold warehouses and industrial land over the next 12 months, and as a consequence we expect prices to increase in this sector. Conversely, we expect rents to see moderate growth over the next year as demand continues to shift more towards freehold warehouses and the expected increases in availability.
The retail sector, one of the pillars of the Spanish economy, performed well in 2004. Activity in the main cities grew and footfall at major shopping centres continued to be high.
The strength of consumer spending in Spain (which grew 5.5% in 2004) has had a direct effect on high-street rental levels, especially in the prime areas and in good secondary locations (Puerta del Sol and stretches of Mayor, Arenal, Goya and Velazquez).
Rental levels have risen in almost all the high-street areas of Madrid, but the increase has been especially significant in the secondary areas. Rents on the prime streets are now in excess of €1,500m2 per year (Serrano) and on Perciados they can reach €2,000m2 per year.
During the last few years, the number of shopping centres has grown significantly and there are now more than 500 shopping centres operating in Spain with a gross lettable area (GLA) of 9.8m square metres – more than half of these openings have been post-1997. Developer appetite for shopping centres remains strong and in 2004, 28 new schemes opened, adding a further 780,000m2 of lettable space to the market.
The last 12 months has seen a growing trend among retailers to develop their own shopping centres in association with a developer – a third of all openings in 2004 were of this type. This is a very effective way for retailers to increase their market shares and expand their coverage.
With regard to shopping centre development financing, there have been no changes in the last year, with debt continuing to be the primary source of finance for the Spanish market.
Offices have also enjoyed improveed performance during 2004 . Office take-up for the whole year reached 650,000m2, an increase of 30% from 2003 confirming a return in occupier demand. Financial and professional services (which includes banks, insurance firms, lawyers and consultants) were the two key sectors driving occupier demand in 2004 accounting for 32% of total take-up.
The outlook for offices in 2005 looks bright, with take-up expected to continue to rise to an estimated 680,000m2, which includes Spanish telecoms operator Telefonica’s partial move to its new headquarters in Las Tablas (80,000m2). In 2006, Telefonica expects to occupy its second office building of 90,000m2 in Las Tablas.
Rents appear to be stabilising across the country, with anecdotal evidence suggesting the end of the downward phase of the cycle and predictions that rents are likely to experience a moderate increase across the market after the summer of 2005. This recovery will be favoured by a lower vacancy rate in 2005 and stronger demand for office space, which should be stimulated by an improvement in economic indicators.
Investor appetite for Spanish real estate remained strong in 2004, with deals totalling €2.6bn. This figure represents a 36% fall in comparison with the total for 2003. However, it does not suggest a decline in investor interest in property. This fall can be explained on two counts. Firstly, 2003 was a record year in terms of investment values and secondly, there was a lack of investment product to meet the demand.
The largest deal of 2004 was the €150m purchase by ING Investment Management of the El Boulevard shopping centre (GLA 80,000m2) in Vitoria in northern Spain.
Office remained the sector of choice for investors, amounting for 64% of total deals done in 2004, followed by retail (15%) and residential (6%). More than half of the deals in the Spanish market were done by national investors, mainly private property companies and private investors.
As in previous years, the German investment funds were the most active cross-border buyers in the market (18% of total volume) followed by the Dutch (10%) and US investors (6%). German and US buyers were active in Madrid and Barcelona exclusively, while the Spanish and Dutch investors were most likely to look for investment opportunities throughout the whole of Spain.
Outsourcing deals in 2004 were scarce, with US and German funds constituting the bulk of the activity in both the office and hotel sectors, which are usually the most prone to sale and leaseback activity.
Strong investor demand, coupled with the lack of stock, has resulted in a further squeeze on yields over the last 12 months. Industrial yields are now 7% in Madrid and Barcelona while office yields have fallen to 5.6%. The yields in the retail market have fallen below 6% in Barcelona, while the market in Madrid remained largely unchanged.
Alvaro Arrospide and Nuria Zamora are directors at DTZ Iberica

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