Talent, clusters and scale are three key reasons why Paris is one of the world’s most attractive office markets, explain Souad Cherfouh and Chris Urwin.
At a macro level, the technology-inspired rise of the knowledge economy in recent decades has facilitated the development of global supply chains; at a micro level, it allows much greater possibilities for remote working and the development of the sharing economy.
In developed nations, however, these trends have not brought the dispersion of people and more even distribution of economic growth that many expected. In fact, populations and economic activity are increasingly concentrated in larger and more successful cities.
In this era of increasing innovation and specialisation, successful companies cannot compete through their own innovation alone. Instead, they must collaborate with other entities to stay competitive. This has ushered in the “network economy”, where success depends upon the strength of relationships between companies and customers, partners, academia, and suppliers.
While the rise of IT allows the long-distance sharing of vast amounts of information, which has been a blessing during COVID-19, it remains the case that the most valuable information is often tacit and most profitably shared face-to-face. This is why, despite the doubts expressed by some commentators over the future of offices, the best office assets in locations underpinned by robust macro and micro characteristics should continue to thrive and find support from investors.
Cities facilitate the sharing of this tacit knowledge, with the most successful characterised by:
- Deep pools of talent in the form of highly-skilled labour
- Well-established clusters of knowledge-intensive activity
- The scale and connections that allow the development of more extensive knowledge networks – it is no coincidence larger cities tend to perform best1
Strength in these factors has seen Paris develop into a globally significant knowledge centre. In AT Kearney’s Global Cities Report, Paris ranked number three, just behind New York and London.2
More than one-in-four workers in Paris are employed in knowledge-intensive sectors, putting it second only to London among major global cities. In previous research, we identified Paris as the most important knowledge centre in continental Europe.3 The pandemic has done nothing to alter our view on its long-term prospects.
Figure 1: Knowledge-intensive employment as a percentage of total employment
Talent and education
The city’s economic performance is driven by a large, well-educated, relatively young, and cosmopolitan pool of labour. Greater Paris has a working-age population of over 6.5 million people, more than four times the average for Europe’s major cities.4
Education is a key component of knowledge-intensive activity. In this regard, Paris again ranks as a global leader. Almost 40 per cent of Paris’s workers are university graduates and almost 15 per cent of the population are foreign-born,5 a feature that helps with connectedness to other parts of Europe and the world.
Paris is also home to world-class educational and research institutions. After London, it has the highest concentration of top universities in Europe, ten in the top 500 for instance.6 The region hosts Europe’s largest pool of students and PhD candidates, approximately 680,000; over 110,000 are international students.7 It possesses several top-ranking business schools, notably INSEAD, HEC and ESSEC.
Clusters and scale
Although Paris doesn’t have clusters of the scale and global importance of some of London’s, it arguably is home to a more diverse range of significant industry clusters. Many of these benefit from national and regional government initiatives that seek to strengthen the links between large companies, small and medium-sized enterprises, research and educational institutes, local authorities and investors. Significant clusters can be identified in areas as diverse as finance, business services, health and life sciences, digital industries, cosmetics, aerospace, fashion and luxury goods.8,9,10,11
Paris is arguably is home to a more diverse range of significant industry clusters than London
Reflecting this breadth of industry strengths, Paris is the global headquarters of 29 of the 31 French companies listed in the Fortune Global 500. After London, Paris hosts the second-largest number of company headquarters in Europe.
Scale is another of Paris’s outstanding attributes. With a population of approximately 12 million in the Greater Paris region, it is one of Western Europe’s two megacities, alongside London. It is the largest regional economy in Europe, accounting for 4.5 per cent of GDP for the EU28 (as it was then). Reflecting the centralised nature of economic activity, it accounts for 30.3 per cent of French GDP, despite representing 18.2 per cent of the population.12
Figure 2: Total population by selected European cities, 2018 (mn)
Geography, connectivity and governance
Paris also enjoys other major advantages, notably:
- Geography: Easy access to some of Europe’s other major regional economies and business centres, for example London, Randstad, Brussels, Rhine-Ruhr and Rhine-Main (Frankfurt)
- International connections: Trade, history and a large and diversified international population provide strong links to many parts of the world
- Good governance: Paris benefits from strong and transparent local governance. Regional government is provided by the Ile de France Regional Council. In turn, each of the Ile de France’s eight departments has a departmental council, of which Paris is the most populous and prominent.13,14 Local politicians enjoy considerable powers, allowing forward-looking policymakers scope for ambitious projects to enhance conditions for growth
Greater Paris ranks third globally for public transport, making it the highest-ranked European city
In McKinsey’s analysis of the urban transportation systems of 24 global cities, Greater Paris ranks third overall for public transport, making it the highest-ranked European city. Notwithstanding policy initiatives to reduce car dependence, Paris also scores well for private transport. McKinsey places it fourth in the world, with only Madrid, the first-ranked centre, besttering it in Europe. Together, these scores help Paris to second place globally for “overarching urban mobility”, with only Singapore scoring higher.15
Meanwhile, as befits a city with such prominent business, cultural and historic links, its international connectivity is also among the most extensive in the world. Passenger numbers from the region’s airports are second only to London’s in Europe.
“Grand Paris” project
Paris has embarked on the largest and most ambitious infrastructure project in Europe, dubbed “Grand Paris”, which will create a ring network to enable suburb-to-suburb connections without having to travel through central Paris. Improved links to the region’s airports are also prominent. The project envisages four new metro lines encompassing 200 kilometres of new track and 68 new stations. Passenger volumes of two million per day are expected.
Paris has embarked on the largest and most ambitious infrastructure project in Europe
The project is not just about transport, however. Rather, it is intended as the centrepiece for the further development of the Greater Paris region. More than one million new housing units are envisaged at a rate of about 70,000 per year over the project’s lifetime (2015-2030). The project also identifies clusters as an enabler of success and seeks to use these to drive the development of new economic centres.
The project could be potentially transformative for real estate markets in the Greater Paris region, with the office sector specifically well positioned to benefit.
Figure 3: The Grand Paris project
Source: Aviva Investors, March 2021
Demand, supply, liquidity
Reflecting its knowledge-economy credentials and concentration of economic activity, Paris is one of the world’s largest and most sophisticated office markets. In floorspace terms, only Tokyo and New York are larger.16 After London, it is judged the second-most transparent major office market in Europe.17 It is also among the most liquid investment markets in Europe, making it relatively easy to enter and exit, even in difficult times.
Paris boasts a diverse office occupier base, with decent affordability strengthening demand. In fact, given its talent and scale credentials, the Greater Paris market appears cheap in a global context, from both an occupier and investor’s perspective.
Of course, demand is just one side of the equation when looking at real estate. Though often underappreciated by investors, the extent and nature of restrictions on new supply are at least as important. Cities vary markedly in terms of the ease of bringing new space to completion.18 Significant supply restrictions are supportive of rents.
The supply-side in Paris is characterised by serious constraints on development, mainly in the form of:
- Natural constraints, notably building density. This is particularly important in central Paris, although less of an issue in peripheral areas
- Regulatory constraints, including:
- Conservation areas that are especially extensive in historic central Paris and some peripheral areas to the south-west
- Height restrictions that remain strict – especially for most of central Paris – with tower developments relatively scarce
The supply-side in Paris is characterised by serious constraints on development
The local planning and policy regime also weighs heavily on the prospects for commercial development. An important means of doing so is via the designation of a ZAC (Zone d’Aménagement Concert é or Concerted/Focused Development Zone). These can be initiated by a local authority or certain other public bodies, such as those charged with delivering the Grand Paris project. The aim of a ZAC is to drive the development of the designated area and ensure the necessary public infrastructure.
Despite measures such as these, Paris, and especially central Paris, counts among the most difficult markets in Europe in which to develop new office space. We estimate the central business district has the second-lowest supply responsiveness in Europe, with only London’s West End tighter.
Low supply responsiveness is supportive of rental growth. Across Europe, a high correlation can be observed between rental growth and supply responsiveness.
Given its scale and diversity, the Paris office market has a broad range of sub-markets, with varied characteristics. Investors need a deep understanding of these differences to capitalise on the city’s strengths.
Figure 4: Our key central Paris office sub-markets
Source: Aviva Investors, March 2021
In the age of the knowledge economy, a business’s most important resource is talent; locations that provide greatest access to talent will benefit from stronger occupier demand. These will be sub-market locations that boast the best:
- Connectivity: Allowing talent to easily access a location
- Amenities: Places where talented people want to spend time
- Business clusters: Allowing talent to be more productive
In addition to robust demand credentials, the most promising sub-markets also have significant constraints on new supply. The results of our analysis can be found by downloading our full whitepaper.