But has the building boom bubble burst?

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For several years, Panama City’s skyline remained largely unchanged, with only four buildings exceeding 150 m (492 feet). Beginning in the early 2000s, the city experienced a large construction boom, with new buildings rising up all over the city. The boom continues today, with over 150 highrises under construction and several supertall buildings planned for construction.

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Wall Street Journal

PANAMA CITY, Panama—This Central American country, known mostly for the bustling canal that bisects it, has found a downside to its surging economy: It has built too many offices and hotels.

Panama’s growth as Central America’s banking capital and its aggressive recruitment of multinational companies with tax breaks made it a magnet in recent years for foreign investors.

Wealthy people and companies in countries like Colombia and Venezuela have seen Panamanian real estate as a stable place to stash capital.

Driven by this demand, Panamanian developers have nearly tripled Panama City’s high-end office market since 2009. They expanded its stock of hotel rooms by roughly 61% in 2012 and 2013 together, according to Lodging Econometrics.

As a result, Panama City’s office vacancy rate has risen to 33.6%, the highest in Latin America, and could go as high as 45% by 2016, according to brokerage JLL. Lease rates for all but the best towers have declined by as much as 30% since 2012, the firm says.

Meanwhile, the country’s average hotel occupancy has fallen to 49.9% in the first 10 months of this year from 72.5% in the same period of 2008, according to Smith Travel Research. In turn, nightly rates have declined by 28% in that span to an average of $108.80.

Property owners and investors in Panama now anticipate several years of office floors sitting vacant and hotel rooms going unused. Many predict Panama’s burgeoning economy will take up the slack, but not for at least another two years, if not longer. Others are watching for owners to start selling hotels on the cheap and for desperate landlords to cut office lease rates further, meaning still cheaper rates for travelers and office tenants alike.

“Too many people started building the same thing without talking to each other,” said Herman Bern Sr., whose family firm, Empresas Bern, has developed 130 commercial and residential projects in Panama since he founded the company in 1978. “Just greed and optimism. It was like, ‘If you are doing it, it must be something good. So I’m going to do it, too.’ ”

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Panama’s appeal is obvious. Its growth in gross domestic product has led Central America for several years, with an 8.4% expansion last year, according to the World Bank Group. The government’s waiver of many taxes for multinational firms has lured scores to establish regional headquarters here, including Johnson & Johnson, Caterpillar Inc. and Procter & Gamble Co. The country, which has a population of 3.9 million people, is lifting its profile with a $5.25 billion widening of its namesake canal to allow larger ships.

The construction boom in Panama also is being driven by a practice known as “strata” investing, in which investors buy floors within towers. Popular in many emerging markets, the practice mitigates risk for developers and provides ample capital.

But it also can stoke overbuilding, which eventually saps the returns of investors through vacancy and declining lease rates. “There was a buying spree, a mood,” said Simon Hafeitz, a partner at one of Panama’s largest developers, Desarrollo Bahia. “Everyone knew there were people coming from outside [investing] into Panama, so they moved ahead” with construction.

Consider the F&F Tower in Panama’s downtown banking district. Completed in 2012, the 540,000-square-foot building is among Central America’s most striking, with a window-sheathed, corkscrew design spiraling up 52 floors. Developer Saul Faskha’s F&F Properties has sold the entirety of the building, half to Panamanian investors, a quarter to Venezuelans and the rest to others across the globe. It is 62% leased, and lease prices have declined by up to 10% since the building opened.

F&F Tower

 

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“I am not concerned, because the customers like the most advanced and newest buildings,” Mr. Faskha said in an email. “That’s why I’m under construction of two more.”

Others don’t foresee a quick recovery for the office market. “There’s probably seven to 10 years of inventory at the reported absorption rates,” said Alex Petrosky, an executive overseeing the Panamanian real-estate portfolio of Inversiones Bahia, the investment vehicle of the country’s Motta family.

Here’s The Donald Again!

 The tallest completed building in Panama City is Trump Ocean Club International Hotel and Tower, which stands 284 m (932 ft) tall and has 70 stories.

 

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