Middle East conflict risks fueling inflation in property sector

Construction of new office space in ​Europe has slumped to its lowest in a decade, even as rents in prime locations hit ‌record highs, research shows, deepening a supply crunch that is forcing many occupants to stay put.

The conflict in the Middle East poses further risk to the sector’s outlook as rising energy prices could add to inflationary pressure, according to a report by property agency Cushman & Wakefield.

After ​emptying out during the COVID-19 pandemic, offices from London to Paris are filling up again as companies ​compel staff to come in on more days. That has helped underpin 20 straight quarters ⁠of rental growth for prime offices in Europe, according to the research.

However, space under construction fell to 10.1 million ​square feet at the end of last year, the lowest level since 2016, the report said, citing the impact ​of high construction and financing costs.

Demand for new office space in London is at over 11 million square feet, about 20 per cent above the long-term average, according to separate research from agency Knight Frank, which also predicted a looming supply crunch. Nearly a third of occupiers ​will end up staying put due to a lack of choice or high prices, it added.

“You can’t turn the ​tap on overnight for supply,” Brad Hyler, co-president of Brookfield’s (BAM.N) real estate group, told Reuters at the Canadian investor’s recently completed ‌central London ⁠tower, the 35-storey One Leadenhall.

The Middle East conflict could weigh on property deals and financing in the short term, Hyler said, but added this was too early to predict and Brookfield still expected a gradual recovery.

RECORD RENTS

Developers like Brookfield that have delivered new office towers post-pandemic have benefited from a dearth of competition. One Leadenhall’s anchor tenant, US law ​firm Latham & Watkins, recently decided ​to take up extra ⁠space in the building, including the top floor at 160 pounds ($214) per square foot – thought to be a record for the City of London financial district – a source familiar ​with the matter said. Brookfield declined to comment.

The tower – which rises above the City’s ​historic Leadenhall market – ⁠is now fully let.

Investment in European office construction totalled 52 billion euros ($60 billion) in 2025, up 14 per cent on the prior year but still roughly half the 10-year average, according to Cushman & Wakefield.

A flight to quality office buildings by occupiers meant a ⁠record ​52 per cent of all space leased across Europe, the Middle East and Africa ​last year was the highest quality, the research showed.

The vacancy rate for this premium space fell to 3.5 per cent at the end of last year, ​while the overall vacancy rate remained steady at 9.8 per cent.