Long perceived as a risky sourcing destination, Colombia has in recent years largely shed that stigma and transformed itself into one of the best business locations in Latin America. Ranking highest on the World Bank’s 2010 Doing Business Report, Bogotá is a forward-thinking city with a focus on IT. But now it seems that a new stereotype about the Colombian capital is taking root. Reports are that real estate prices in the city have been rising, and buy-side companies are concerned. Are the rumors true? To get the story, we spoke with real estate analysts, private vendors on the ground, and the city’s promo agency Invest in Bogotá.
Large Price Variation
With a population of 7.3 million, Bogotá is one of the biggest cities in Latin America. Characteristic of that scale is the level of real estate price variation between different areas in the city, which in Bogotá is substantial. Part of it is due to the migration of businesses away from downtown in the last two decades into the northwest part of town, which has now become the commercial and financial center. Rental prices for office space are highest here. To give an example, a prime high rise facility that an IT company could rent would be priced at approximately US$ 35 per m2, while a Class B space intended for a BPO contact center would run at $11-17 per m2.
Why such a large price variation? “Some years ago developers would simply build the basic structure, but these days clients are demanding more complete packages”, says Mónica Ramírez, Senior Investment Officer at Invest in Bogotá. “So builders now incorporate things like electricity and broadband connectivity, which drives up rates. The starting price is $25 per m2, but these offices will include almost everything – it reduces the investment clients have to put in when they occupy”. According to the Bogotá Chamber of Commerce, the highest possible rental price for office space is $40 per m2.
“Real estate cost is not the most significant driver in site selection. Whether Bogotá is acceptable from the skilled labor and wage standpoint is what will deliver cost savings for a company, and will ultimately make the city attractive as a sourcing destination” – Susan Arledge, of Arledge Partners
Supply and Demand
However, the fact that rental prices vary across Bogotá doesn’t mean that real estate for the city as a whole is getting more expensive. We got an on-the-ground perspective from Ricardo Duran, President of local provider Outsourcing SA, who doesn’t think prices have risen at all. “Bogotá is competitive in terms of real estate”, he says. “I have two call centers downtown and one in the north of the city. I’m paying the same low rate for both areas”.
The people at Invest in Bogotá do admit that prices have risen slightly, but everything we’ve heard suggests that the increase is too small to be a serious concern for companies, at least for the time being.
What is concerning is the diminishing supply of sizeable office space in Bogotá, and the effect it will have on real estate prices in the next five to ten years. “The supply in Bogotá right now is for small to medium spaces, not large spaces”, says Jeff Pappas, Executive VP of Transaction Services for Arledge Partners Real Estate Group. “Very few US companies are going to come in on a small scale – they want facilities upwards of 2000 square meters. It’s the lack of that kind of space that’s going to drive up prices in Bogotá”.
Statistics on Bogotá’s available office space also need to be read correctly, says Pappas. The total available space in 2009 was 700,000m2 with a projected growth of 10.8% over five years, making the available space in 2014 around 775,000m2. This looks promising until we look at the absorption rate in Bogotá, which in 2009 was 120,000m2/year – easily greater than the projected increase. “Bogotá is becoming a sourcing hotspot, and the demand for space is huge. There will be a supply issue”.
Projections for the Future
According to Pappas, one of the criticisms regarding the supply of sizeable office space is that there is not a lot of speculative development in Bogotá. Small local firms that started years ago have now grown and are absorbing the larger spaces, leaving the Free Trade Zones in the south of the city as the only option for international companies. Bogotá is trying to ramp up a few notable construction projects, with plans for the largest skyscraper in Latin America (BD Bacatá) in the works. But it may be a few years before supply and demand of larger office space in general can be balanced.
For the time being, companies are relying on creative renovation, as Susan Arledge, CEO of Arledge Partners puts it. “We go in and convert buildings like malls or car dealerships, renovate them and use them for call center operations. That’s where you’ll see the best real estate prices”.
The Effect on the Buy-Side
Reports that US firms are being deterred by escalating real estate prices in Bogotá are largely exaggerated. In fact there’s nothing to suggest that the buy-side is at all concerned about the slight increases, and Bogotá remains quite comparable to other emerging ITO locations “We actually visit some buildings with potential investors”, says Ramírez from Invest in Bogotá. “For medium to small operations there is a huge offer in Bogotá, and we generally have not seen problems for companies”.
Arledge agrees – “Real estate cost is not the most significant driver in site selection. Whether Bogotá is acceptable from the skilled labor and wage standpoint is what will deliver cost savings for a company, and will ultimately make the city attractive as a sourcing destination”.