Rio's Downtown Has 25 'Stranded' Real Estate Assets Sitting Vacant Since 2019: Is It Time to Rethink the Leasing Strategy?
- The average office vacancy rate in the city of Rio de Janeiro is 27.7%, according to exclusive data from SiiLA's Market Analytics.
When is the right time to rethink the leasing strategy for an office building that has remained largely vacant for years and consider adopting a new approach? The question, which could literally be worth millions of Brazilian reais, is not a simple one and may depend on multiple factors.
According to data from SiiLA's Market Analytics platform, the city of Rio de Janeiro is home to at least 31 office properties that have had vacancy rates of 50% or higher continuously since 2019. Of these, seven have been 100% vacant since the pre-pandemic period, while another 10 have posted vacancy rates of 75% or more for more than six years.
Some of these relatively new assets, delivered in the 2010s, include the Vista Carioca – West Tower, a Class A+ building in a prime location on Avenida Presidente Vargas, directly across from a subway station and close to landmarks such as Central do Brasil, Candelária and Santos Dumont Airport. Yet not a single square meter of its 15,900-square-meter leasable area has been rented since the building was delivered in 2016.
Just in property taxes (IPTU) to keep the asset in good legal standing, GTIS Partners, the property's owner, spends approximately R$117,800 per year. The asking rent for one or more floors in the building is R$86.20 per square meter. The average asking rent in the city, according to SiiLA data, is R$75.39 per square meter.
Just a few blocks away is another example: the landmarked Edifício Novo Mundo on Avenida Presidente Wilson. Despite undergoing an extensive modernization that transformed it into a Class A property, the building has not leased a single floor since its relaunch in 2018.
The asset is currently owned by PREVHAB, a closed pension fund, and offers office space for a relatively modest R$68.81 per square meter. The owner spent more than R$52 million on the retrofit alone, without generating a single cent in return so far.
The Best Strategy Is Caution
So, what should be done with an office property that has experienced high and persistent vacancy for so long, even though it is well located and sits in a market that is showing signs of recovery?
Figures from SiiLA's Market Analytics platform for the second quarter of this year indicate that Rio de Janeiro's office market has been slowly regaining momentum in recent years. The city's vacancy rate currently stands at 27.7%, down from 34.6% in 2021.
According to André Mizrahi, CEO of Hub21 Advisors, a boutique firm specializing in real estate transaction brokerage and deal structuring, there is no single metric — whether vacancy or another indicator — that determines when a property's use strategy should be redesigned.
“Being 80% or 100% vacant for many years is an important signal, but you need to understand whether the problem is cyclical or structural. One of the best indicators is to compare the asset's performance with that of its direct competitors. If the market begins to recover and that property remains vacant, even after rent reductions, rent-free periods and other incentives, the market itself is probably signaling the need to reposition the asset or rethink its highest and best use,” he says.
In Mizrahi's assessment, when dealing specifically with assets that have remained vacant for extended periods, owners should first consider whether they are asking the right question.
“You need to stop asking only, ‘How can I lease this office?’ and start asking a broader question: ‘What is the best use for this property today?’” he suggests.
Simpler, More Options
Speaking to REsource, André Araújo, CEO of Real Price, explains that, despite the counterintuitive nature of the idea, Class A assets such as Vista Carioca can actually present even greater challenges when owners try to shift their business model from office use to other segments, such as residential.
“Large, deep floor plates, a central core, a glass façade and limited plumbing shafts make for a good office but a difficult apartment building, since residential units need windows, ventilation and a bathroom in each unit,” he says.
According to Araújo, in such cases, the strategy should involve considering a repositioning of rents and lease terms — including rent-free periods, delivering fully fitted-out space and subdividing floor plates. Other options include a mixed-use strategy, with part of the property dedicated to residential and part to office space, or converting the asset for healthcare, education, hospitality, serviced apartments or public-sector use.
Despite the examples of “ghost” properties cited at the beginning of this article, the reality in downtown Rio offers positive long-term prospects for the real estate sector.
“I see downtown [Rio de Janeiro] as one of the major long-term real estate opportunities, with an entry price that is still discounted compared with other neighborhoods in Rio,” he adds Mazrahi, from Hub21.
