The central London office market is expected to emerge from the current downturn next year, as availability starts to fall due to fewer development completions and an improving economy in 2010 according to Knight Frank.
Knight Frank predicted that the office leasing market would see supply peak in 2009 then decline thereafter, with rental growth returning in 2011. In addition:
Central London availability to peak at 27m sq ft in 2009, before falling by 36% from early 2010 to the end of 2012;
Rents in central London are forecast to fall further this year then rise in 2011;
Take up will fall to 7m sq ft in 2009, then will begin rising again next year, recording an average increase of 27% per annum between 2010 and 2012.
Knight Frank said that the office investment market would attract interest from private buyers, albeit there would be more limited demand for larger lot sizes.
On the medium-term outlook, Knight Frank predicted:
From the second half of 2009 speculative and recovery play investors would enter the market, to pre-empt the economic recovery and take advantage of the over-correction in prices;
At a time when the Government is expected to begin printing money, commercial real estate could in the medium-term benefit from investors seeking a hedge against higher inflation.
Meanwhile the super-prime residential market was likely to see prices rise from 2010 as stronger demand met low supply levels.
Prices in prime Central London were likely to fall by 30% from peak to trough, a process which should be completed by mid to late 2009.
William Beardmore-Gray, partner, central London leasing, Knight Frank, said: "Central London is now 18 months into the downturn and we forecast 2009 to be the eye of the storm. There is structural demand in the West End and the City which now requires the right conditions to be activated. Incentives are peaking and will start to fall in 2010. Central London rents will continue to fall for 18 months as supply peaks at the 2003 level of 12.1%. We forecast a return to rental growth will return in 2011."
Ker Gilchrist, partner, central London investment, Knight Frank, said: "London offices as an investment are seen as offering value in relative terms set against other global business centres, and while values may have further to come off, the market is clearly further down the line in the process of re-pricing in the face of recession. London also benefits from offering a transparent real estate investment market."
James Roberts, head of central London research, Knight Frank, said: "2009 will undoubtedly be a tough year, but London has deep roots in the system of global trade and the capital will come through this downturn. We believe that spin-off companies from the large banking groups, law firms, management consultants, and advertising firms working on World Cup 2010 and 2012 Olympics contracts, will drive demand in the next cycle."
Ian Marris, partner, London Residential Development, Knight Frank said: "The super prime residential market has seen weaker demand in the last six months, however with prices now below peak levels, together with the falls in Sterling, demand is likely to now grow towards the end of 2009. We anticipate a return to growth in 2010 as low supply levels become critical."
John Snow, head of central London offices, Knight Frank, said: "The occupier market is labouring under the weight of the global recession, but London is a major hub in the international economy, guaranteeing it a share of the recovery for the global economy forecast in 2010. Moreover, the office investment market has corrected faster here than other comparable cities.
"In the early 90s downturn it was often easy to imagine the bad times continuing far in to the future, and impossible to envisage a turning point. But the cycle did turn and the same will happen again. New demand from a restructured financial sector, professional firms which are growing in importance, and emerging markets companies seeking a London brass plate, will generate the office demand for the next cycle."
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