Last summer, Gmp Property SOCIMI SA began developing an office building without any preleasing, one of the first so-called speculative projects that the Madrid real-estate market has seen since the boom years.
This year, Gmp doubled down further on the office market. In April, the Spanish real-estate investment trust bought an older property with plans to fully modernize it.
“We trust the market now,” said Xabier Barrondo, Gmp’s managing director. “And there is a real lack of good quality space in Madrid.” 
New office projects are being launched in Madrid at the greatest rate since the 2008 financial crisis. Construction all but disappeared during the financial crisis and its immediate aftermath as demand and financing evaporated.
But office development is making a comeback. About 200,000-square- meters of new space is slated to be delivered in Madrid this year, compared with 8,400-square-meters last year, according to Cushman & Wakefield. The new space comes as many landlords are also renovating older buildings to include modern space and amenities.
Most of the development involves upgrades of older buildings to include modern space and amenities. But speculative projects also are moving forward.
Hispania Activos Inmobilarios Socimi has started foundation work for two office buildings on a Madrid site the company purchased last year for 32 million euros. “For the first time we are negotiating power shifting from the future tenants to the landlord,” said Cristina García-Peri, general manager of Hispania.
The development boom has been triggered by the biggest surge in demand Madrid has seen in years from the financial, consulting and other service firms that drive the city’s market. Technology companies also are expanding, including one of the biggest leases of last year, the 21,000-square-meters leased by Chinese telecoms firm Huawei at Castellana Norte B.P.
In the first half of this year, companies leased a total of 231,000-square- meters, up 10% from last year, according to Cushman & Wakefield.
Adolfo Ramirez-Escudero, chief executive officer of CBRE Spain, said his team is looking for a total of about 80,000-square-meters of space for clients. “We haven’t had that much in years,” he said.
Office vacancy fell to 12% in the second quarter of this year, a level not seen since 2009, according to Cushman & Wakefield. It was 18% in 2013.
Meanwhile, rents in the central business district—Madrid’s most coveted location—rose to €30 a square meter a month in 2016, up 22% from 2013. The rate is still far below its prerecession high of €40 a square meter.
Broader market rents hit €19.3 a square meter last year, up 12% from its recession low. Experts are expecting rent growth of anywhere from 10% to 15% a year in the next few years.
“We have zero vacancy in our portfolio,” said Pere Viñolas, chief executive officer of Colonial Group, a real-estate investment trust with about 40 properties in Spain. “Supply is lagging demand.”
Mr. Vinolas said that after seven years of either falling or stagnating, rents jumped an average of 10% to around €20 a square meter last year. Colonial is developing two speculative office buildings in Madrid—something the company hasn’t done around a decade—and overhauling an older building.
Mr. Vinolas said that he spent about €2,000 a square foot to buy two office towers that total 16,000 square meters. The firm will spend another €1,500 a square foot on renovations, but he views the deal as a bargain because existing Grade A office space is fetching €6,000 a square foot from investors eager to capitalize on Spain’s improving economy.
“Building was cheaper than buying,” he said.
Landlords say tenants are looking for modern buildings in city centers to appeal younger workers. Those properties are in short supply in Madrid, where the average buildings is about 25 years old, CBRE’s Mr. Ramirez said.
Gmp is asking between €26 and €33 per square meter a month in its two renovated towers, which are located in the Central Business District and recently hit the market. It spent €24 million to upgrade 77 Castella, a 16,000-square-meter property which is still empty. About a quarter of neighboring 81 Castella has been rented since the 38,000-square-meter building received a €30 million face-lift.
“We are going to be very demanding about rent,” Gmp’s Mr. Barrondo said. “We know we have a great product.”
A dearth of Class A buildings in the city center moved Gmp to purchase a tower at Manuel Cortina 2 earlier this year for €72 million. It is slated to be completed next year after a €21 million renovation. Construction has already started on Oxxeo, a 14,200-square-meter building scheduled for completion next year.
“A lot of owners haven’t been renovating their buildings as they should,” Mr. Barrondo said. “That is why we are so confident.”
