London leads the way in market recovery

After a catastrophic slide in which building prices fell by more than 40 percent, London’s commercial real estate market seems to have hit its bottom.

While New York commercial property is still searching for a floor and is expected to continue falling, in its rival and sister city across the Atlantic, things are looking up. Sale prices have started inching upward, prime-area rents are stabilizing, and new leases are increasing — albeit from a very low base and with vacancy rates still rising.

It’s hardly a return to boom times, but market analysts say the third quarter of 2009 was the best since the financial crisis hit last fall.

“We very much believe the bottom has been reached,” said James Young, head of Cushman & Wakefield’s office in London’s financial district. “We’re a lot more optimistic than perhaps some other markets around the world.”

Eighteen months ago, Young said, many thought London would lose the prominence it shares with New York as a global financial center. Now, with the health of the banking sector improving, “that fear seems to have dissipated,” he said.

London sale prices slid between 40 and 50 percent in a disastrous 2007 and 2008. Now some bargain hunters are beginning to sense opportunity, and have begun bidding prices up again, although analysts aren’t yet sure how much they’ll rise.

The picture is brighter on the investment side than in the office leasing market, where some rents are still falling despite an uptick in the amount of space companies are seeking.

Sales volumes of buildings in central London are on track to hit $13.4 billion this year, said Julian Stocks, the head of capital markets, specializing in commercial property, at Jones Lang LaSalle. That’s an improvement from 2008’s $10.9 billion, but still weak against a long-term annual average of about $17.5 billion, he noted. (Figures were converted from British pounds based on the exchange rate last month.)

It’s a contrast to the still-dire situation in New York, where building sales transactions are down roughly 92 percent to $3.2 billion for the first three quarters of this year, from $39.6 billion at the same time in 2007, according to Eastern Consolidated.

Meanwhile, REITs are also looking to invest in London again. And with no new development underway, and the pipeline of work started before the credit crunch starting to dry up, supply is beginning to dwindle.

But despite the new burst of buying and selling, times are tough for landlords.

“There’s a bit of a disconnect between the investment market, which is suddenly recovering, and an [office leasing] market which is still under pressure,” Stocks said.

The amount of newly leased space jumped 64 percent from the second to third quarters, to 1.86 million square feet, Cushman & Wakefield reported. That was more than double the all-time low in the first quarter of this year.

However, new space coming onto the market pushed vacancy rates up to 8 percent, and in the core area of the financial district, they’ve hit 12 percent, Young said. In contrast, New York vacancy is 11.1 percent and could go as high as 16.3 percent depending on job losses, the company said.

Vacancies have kept rents under pressure in London. In less-central neighborhoods and second-tier properties, rents are still sliding, and everywhere, landlords’ frequent offers of two rent-free years make real rents even lower.

Cushman says prime rents in London’s financial district have now hit bottom at about $70 per square foot, compared to a peak of about $107 in mid-2007. In the pricier West End, rents are stabilizing at $124 per square foot, down from about $182, Stocks said.

In Manhattan, average asking rents are off 29 percent from their peak.

Things are also brighter in London’s residential market. After seizing up late last year, London housing prices are rising, unlike in New York, where some are predicting they could drop another 15 percent.

Alan Clarke, U.K. economist at BNP Paribas Bank, predicted rising unemployment and tight credit would limit further price increases, but said there was little chance of another steep fall.

Others are more pessimistic. Jones Lang LaSalle said the bounce-back in prices would prove illusory: The firm predicted a 7 percent decline in 2010.