Two floors of a prime lakeside office building in the heart of Zurich’s financial district remain empty six months after they were offered for lease. While that’s a cost for owner Zurich Insurance Group AG, slashing rents to attract tenants could be worse.

When asking rents are lowered, it can trigger a downgrade in the valuation of the properties on the owner’s books, potentially costing more than they may lose in rental income. For the insurers and other institutional investors that are among the biggest owners of Zurich office properties, that’s something to be avoided.

“It’s better to have a vacant property with potential than lower cashflow and a cheaper valuation,” said Ernst Schaufelberger, head of real assets at AXA Investment Managers Schweiz, a unit of French insurer AXA SA.

Insurers have been loading up on real estate as income from premiums remains sluggish and record-low interest rates hurt returns from government securities. The amount of vacant space advertised has risen over the last six years in Zurich and all of Switzerland’s financial centers “remain fragile and vulnerable to shock,” Credit Suisse AG said in a report.

The large number of institutional investors such as insurance companies and pension funds based in Zurich, as well as Switzerland’s reputation as a safe haven, has pushed money into the city’s biggest and most expensive offices.

“Swiss Life, Swiss Re and Axa are among the largest property owners” in the Zurich central business district, said Soenke Thiedemann, head of valuation at CBRE in Switzerland. “In the past, many institutional investors could not invest as much as they wanted to in real estate. Now many of them are looking to invest more in the properties they have.”

Rent Incentives

One alternative to cutting rents is offering incentives such as rent-free periods that effectively cut the costs for tenants while maintaining the official rental rates.

“Incentives are a widespread trend nowadays,” said Giorgio Engeli, head of real estate portfolio management at Swiss Life Asset Managers, a unit of Zurich-listed Swiss Life Holding AG. “On a 10-year rental contract a rent-free period of several months is usual.”

His company has around 20.5 billion francs ($20.9 billion) of Swiss property, of which around one-third is office blocks. Real estate made up 21 percent of assets under management at Swiss Life at the end of 2016, second to bonds with 60 percent.

Not Advertised

Many spaces in Zurich have been empty for so long that they’re not being advertised at all, making the vacancy rate seem lower than it really is, according to Credit Suisse.

“Agents hope to avoid the stigma of a shelf-warmer,” the bank said in a report this month. If space not advertised on online portals is included, it shows “the volume of space offered has not fallen in recent quarters, as claimed by many market observers, but has actually risen continuously.”

Alfred-Escher Strasse 50-60, Zurich Insurance’s lakeside property situated just behind its headquarters, was put up for rent six months ago, according to Cornel Widmer, the company’s global head of real estate. With four of the six floors rented out, he is happy to sit tight and wait for a tenant for the rest.

“We are also looking at this from a portfolio perspective; if it’s not anoptimal time we prefer to delay letting to secure a better price,” he said.

In Zurich, office rental prices are recovering after falling in the second half of last year, according to data from broker CBRE Group Inc. Still, vacancies in the central business district were among the highest in the city at 4.5 percent, with median asking rent of 500 francs annually per square meter also the most expensive. The city’s average vacancy rate is 3 percent.

Staying Central

While the financial crisis caused some big banks to move some operations to cheaper areas to save costs, that market shift is now over, Widmer said. Pricing is probably improving and Zurich Insurance views the market quite positively, he said. Engeli of Swiss Life agrees that the worst price correction has already happened.

Zurich isn’t the only Swiss city that has seen rental returns on office buildings squeezed. the market for office space has become more saturated across other Swiss financial centers as diminished bank secrecy causes some lenders to shrink, said Bernard de Halleux, Swiss country head at asset manager Candriam Investors.

“In Geneva, almost every week I get messages from agencies proposing real estate,” he said, adding that he sees a similar trend in Lugano, Switzerland’s Italian-speaking financial center.