Vacancy Rate of 22% Passes for Progress in Beleaguered Sao Paulo

(Bloomberg) -- Lopes Supermercados SA, a small supermarket chain on the outskirts of Sao Paulo, has started opening stores again after enduring three years of economic malaise. Meanwhile, co-working startup WeWork Cos. opened its first office in the heart of Brazil’s financial capital three weeks ago, with five more planned through January.

Vacancy rates for prime-quality commercial real estate in Sao Paulo started dropping in September for the first time in five years, a decline that has continued through May as growing companies gobble up space and longtime Brazil investors indicate it’s time to buy. The activity is a welcome sign in a market pining for good news.

About 22 percent of Sao Paulo’s 2.6 million square meters (28 million square feet) of top-quality office space was empty in May, according to the most recent Engebanc study. That compares with the record 26 percent registered in September. Vacancy for industrial and logistics space was at 30 percent in the city’s suburbs in May, up slightly from the 29 percent in the first quarter, with one big new facility in the region adding to capacity.

Vacancy Rate of 22% Passes for Progress in Beleaguered Sao Paulo

Brookfield Asset Management Inc., which has been in Brazil since 1899, and CBRE Group Inc., since 1979, say the market is set for a recovery, with companies taking advantage of low rents to upgrade their facilities. The “flight to quality” has been going on for a while and will continue, steadily restoring the market to health, they said.

“We’re buying great-quality assets in a valley, with depreciated rental prices,’’ CBRE Brazil President Walter L.M. Cardoso said at an investor meeting in June to celebrate developer TRX Group’s 10th anniversary in Sao Paulo.

The outlook for interest rates is adding to investors’ enthusiasm. An easing cycle at the central bank is poised to reduce the benchmark interest rate to 8 percent by year-end, according to the most recent weekly survey of economists. That compares with a record high of 14.25 percent last September.

There are still reasons to be wary. Brazil’s markets remain volatile, and the fragile real estate recovery could easily be derailed by new political turbulence or another economic shock. Roberto Perroni, chief executive officer of Brookfield’s Brazil unit, said he delayed his expectations for economic recovery by six months because of the leak in May of recordings implicating President Michel Temer in a corruption scandal.

Experienced investors warn that real estate requires long-term commitments. And improvement in Sao Paulo may not be enough to lift the rest of the country. Rio de Janeiro, struggling with a bankrupt state and a still weak oil industry, has a record vacancy rate of 48 percent for office space, compared with 44 percent in September.

But even with those risks in mind, some companies are ready to expand. Lopes, which operates 27 supermarket locations, took advantage of rock-bottom rents to upgrade its distribution center in June. The company rented a 32,000-square-meter warehouse at TRX’s logistics complex located near its headquarters in Guarulhos, the home of Sao Paulo’s international airport. The move more than doubled the size of Lopes’s distribution capacity and will allow it to expand in the next decade, said the retailer’s CEO, Marcio Barros.

“The crisis drove prices down, and we were able to close a very interesting deal,” Barros said in a phone interview. “Five years ago, I wouldn’t be able to even have a conversation with them, because of the price.”

Barros’s investment plans, including the distribution center and three new locations this year, are based in part on a bet that the economic crisis will subside. He expects consumers who migrated to stores that sell at bulk at cheaper prices will go back to shopping at their neighborhood markets.

“Buying in bulk is not a pleasant shopping experience. People do it for the sake of saving. My level of service, my diversity of offering -- people will come back when unemployment and revenue are not such big concerns,” Barros said. “Today the population is in panic.”

WeWork, which started operating in New York right after the global financial crisis in 2008, just opened its first shared office in Brazil, at Avenida Paulista, with 2,000 desks. The company is set to open five new locations, including six floors -- or as many as 1,000 desks -- at Vista Faria Lima, a premium service building owned and managed by CBRE at the trendy financial and technological neighborhood. WeWork offers a one-seat private office in the building for 1,470 reais ($464) a month.

Other investors are taking notice. RB Capital, the Brazilian unit of Orix Corp., and Macquarie Capital are raising $400 million for a new fund to invest in logistics real estate, managed by Thomaz Camargo, an 18-year veteran of the sector who has worked at CBRE and Equity International’s Brazilian unit. The two companies plan to each contribute about 10 percent of the fund.

“Our plan is to spend this money over five years -- something around $100 million or 100,000 square meters of warehouses per year,’’ Camargo said in a phone interview. “We see a window to buy assets and develop them, having as a backdrop the drop in interest rates.”

The challenge for potential real estate buyers is to gauge how quickly and how much rental rates will recover, said Brookfield’s Perroni, who oversees a portfolio of more than $12 billion in assets. While many of the assets Brookfield is eyeing are on the market for below replacement cost -- the amount it would require to construct a new building -- the deals aren’t necessarily doable, he said at the TRX event in June.

Still, Brookfield has “a lot of appetite for Brazil” and is on the prowl for office buildings and logistics spaces, he said.

“We’ve been investing in Brazil for the last 100 years, in moments of crisis and in moments of euphoria,” he said. “We did make some investments in moments of euphoria, and those were not the ones that made us money.”