Polarisation in the London office market
Making sense of the latest trends in property and economics from around the globe
5 minutes to read
British Land and GIC's sale of a 50% stake in their new, trophy office development to Abu Dhabi's Modon Holding is a vote of confidence in London's office market. It's also a sign of things to come.
A deepening polarisation, both in occupier and investment markets, is one of three key dynamics that will shape the London market through 2025, Knight Frank's global occupier research head Lee Elliott writes in a new paper for the London Series. Institutional investment in relatively low-risk core assets - like Modon's acquisition of 2 Finsbury Square - is expected to drive activity this year. Granted, the deal is particularly notable because Modon is sharing development risk, but the property is already one-third pre-let to Ken Griffin’s Citadel. Completion is due in 2027.
The outlook for trophy properties differs starkly with those available at lower prices but with significant limitations and future expenditure requirements. The polarisation extends to investor types too - institutions competing for the best properties will be active, as will private investors competing for smaller lot sizes, while others wait on the sidelines.
Momentum
Momentum is another of Lee's three themes. Active demand has grown by 1 m sq ft year-on-year, with take-up increasing by over 0.5 m sq ft each quarter in 2024, surpassing 3 m sq ft in Q3 – the strongest third-quarter performance since 2019.
On the supply side, total available office space has declined by 1.7 m sq ft over the year, driven by both this increasing occupier engagement, and refurbishment, repurposing, and repositioning efforts on the supply side. Vacancy rates have also fallen, decreasing by 80 basis points over the same period. Geographically, core markets – bolstered by the Crossrail effect – have sustained a stronger cadence than non-core markets. See the piece for more.
The paper is part of the London series, but many of these themes extend to other markets. Momentum is building in occupier markets across the south east, according to Knight Frank's latest M25 report. Total space transacted climbed nearly 5% during 2024 to the highest annual total since 2019. A total of 347 deals were completed, 31% above the 10-year average. Notably, 10 deals exceeding 50,000 sq ft were completed, the highest total for this size range since 2021.
US housing
The US Federal Reserve is likely to hold rates steady when it publishes its decision later today, ending a run of three consecutive cuts. This is predictable, given the policy uncertainty that hangs over the Fed's rate setters.
Policymakers had incorporated "placeholder assumptions” as to how President Trump's policies might impact the outlook in the December decision. The meeting minutes suggested that policymakers reckon incoming policies could stoke inflation and weigh on growth.
The housing market has proved remarkably resilient given the fact mortgage rates have hovered around 7%. House prices climbed 3.8% in the year to November, according to the S&P CoreLogic Case-Shiller Index, out this week. The 20-City Composite posted a year-over-year increase of 4.3%, up from a 4.2% increase in the previous month. New York again reported the highest annual gain among the 20 cities with a 7.3% increase in November, followed by Chicago and Washington with annual increases of 6.2% and 5.9%, respectively.
Mortgage rates have ticked up again since November, which will weigh on the figures in the months ahead.
Tariffs
The likely severity - and subsequent impact - of Trump's tariffs hangs over the global economy. It doesn't look good from a domestic perspective. Modelling carried out by Oxford Economics before Trump took office suggested that tariffs broadly similar to those announced so far would push both Canada and the US close to or into recession.
Bloomberg has dug through data and new transcripts of Fed policymakers’ discussions at the height of Trump’s first trade war:
In 2019, the first full year after Trump began imposing the levies — which were much more carefully targeted versus the broad ones he’s threatening now — the US lost 43,000 factory jobs, industrial production contracted, business investment stalled and real median household incomes fell for the first time in five years. By one estimate, the hit to consumer earnings was $8 billion.
The impact on the UK and Eurozone looks less clear. Inflationary fears over trade tariffs and UK employers passing on big selling-price increases is one scenario, Panmure Liberum chief economist Simon French wrote in the Times this week. Equally plausible is a China-led disinflation of global goods prices and lower domestic wage growth, he added. Each path would necessitate a very different policy response from the Bank of England.
Declining output
The Bank of England decision on Feb 6th comes at an interesting moment. Policymakers will likely vote to cut the base rate, but guidance as to the outlook will be seized upon; on the one hand, the pound is the world's worst performing major currency this year, which could add as much as 0.23 percentage points to inflation in the coming quarters, according to Bloomberg modelling. Meanwhile, wage data last week showed earnings grew at an annual pace of 6% in the three months to November, double the 3 per cent pace the BoE thinks broadly consistent with the inflation target.
Yet pessimism among companies would suggest these wage increases can't hold. A net 22% of private sector companies expect their output to decline between now and April, according to the latest CBI survey published in the Times. The reading was broadly unchanged from December, which was the weakest month in more than two years.
Analysts at Morgan Stanley lowered their forecast for GDP growth in 2025 to 0.9%, from 1.4 per cent. They reckon the BoE will cut the base rate five times this year. Goldman sees six cuts by the middle of next year. The base rate will also settle much lower than markets are expecting, according to bond trading giant Pimco. Writing in the FT, Peder Beck-Friis, a senior vice-president and economist at the firm, reckons the base rate will fall to between 2 and 3%, rather than the 4% markets are pricing:
"Even if the BoE is cautious with rate cuts in the first half of this year, we see room for the rate to fall by more than the market expects. The BoE might eventually follow other central banks, including the European Central Bank, Bank of Canada, Reserve Bank of New Zealand and the Riksbank in pivoting to faster cuts."
In other news...
JPMorgan eyes space at former Credit Suisse tower in Canary Wharf (Reuters).