(Bloomberg) -- There are growing signs that the worst may be over for Rio de Janeiro, at least for commercial real estate.
Rio office occupancy is inching up for the second straight year, as the oil industry emerges from a sprawling corruption scandal that was compounded by a price rout and a bankrupt state government, according to CBRE Group Inc, which tracks rentals and has its own database based on private surveys.
As oil prices rebound and state-controlled oil company Petroleo Brasileiro SA slims down by selling assets to and partnering with global majors, there’s a resurgent demand for prime office space in downtown Rio. With a mega-auction coming in October that’s expected to attract the likes of Exxon Mobil Corp, Royal Dutch Shell Plc and Chevron Corp, the outlook is quickly improving.
“We’re expecting a very positive year,” CBRE’s country chief for Brazil, Walter Cardoso, said in an interview at Bloomberg’s Sao Paulo office. “There’s a lot going on in the oil and gas markets.”
There’s already notable action in Rio’s commercial buildings. Shell -- one of the winners of recent oil licenses -- is currently moving into the Ventura Corporate Towers, across from Petrobras’ headquarters. Shell will expand from three to eight floors in the downtown building where Schlumberger Ltd and Baker Hughes also have offices.
Malaysia’s Petronas recently took on Brazil exposure after agreeing to buy stakes in two oil fields from Petrobras.
Following the World Cup in 2014 and just before the Summer Olympics in 2016, the State of Rio de Janeiro declared a fiscal calamity and stopped paying civil servants on time. The Army was called in to intervene in public security to contain growing criminality and a soaring murder rate.
Rio’s net occupancy rate fell for four straight years starting in 2014. Large companies like Petrobras and telecom operator Oi SA were forced to cut costs and reorganize operations, and other oil producers and were in retreat after years without any new oil licenses for them to invest in. Major oilfield service companies like Schlumberger Ltd pulled back as exploration investment contracted.
All the woes, combined with new buildings being completed, led to a 27% vacancy rate in commercial real estate market in Rio in 2017, an all-time high, according to CBRE. That rate fell slightly in 2018 and remained stable in the first quarter of 2019, but is poised to drop further, CBRE’s Cardoso said. In 2012, the vacancy rate was just 3%, he said.
Still, violence, poverty and a fiscal crunch continue to afflict Rio and have encouraged some businesses to relocate to Sao Paulo. Petrobras continues to retreat from some downtown offices to concentrate staff at its Edise headquarters.
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Between 2017 and 2018, Brazil raised 28 billion reais ($7 billion) through oil licenses auctioned to nearly 20 companies. A record number of rounds were organized under the conservative presidency of Michel Temer, who scaled back nationalist regulations to attract Big Oil. Far-right president Jair Bolsonaro, who took the reins in January, is continuing the trend with another three rounds planned for 2019.
With the auctions, Brazil has surpassed Mexico and Venezuela to become Latin America’s biggest oil producer. Oil regulator ANP expects the recent rounds will help Brazil to triple oil production to 7.5 million barrels a day in 2030, as fields take years to reach production potential.
Tax revenue from the exploration of the auctioned oil wells, will also help the State of Rio put its accounts in a better shape, Cardoso said. Brazil’s oil tax revenue is expected to rise from 60 billion reais in 2018 to 300 billion reais in 2030, oil regulator ANP said. A big chuck of it will stay in Rio, a state which historically concentrates most of the country’s production and where oil companies have their headquarters.
“Brazil rose to a new level after these rounds,” oil regulator Decio Oddone said in an interview. “Current revenue is small compared to what is yet to come.”
While the rebound is slow-moving, CBRE, the world’s largest commercial real estate services provider which has been in Brazil since 1979, is seeing the highest quality space fill up first.
“A flight to quality has started in Rio de Janeiro,” CBRE’s Vice President Adriano Sartori said in the Sao Paulo interview. “It’s the beginning of a cycle.”
--With assistance from Patricia Lara.
To contact the reporters on this story: Fabiola Moura in Sao Paulo at firstname.lastname@example.org;Sabrina Valle in Rio de Janeiro at email@example.com
To contact the editors responsible for this story: Daniel Cancel at firstname.lastname@example.org, Peter Millard
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