Key insights
- Morgan Stanley is cautious on Paris office stocks due to rising vacancy rates and weakening economic conditions offsetting inflation-driven rent growth. AI disruption poses a long-term risk. While most European companies have hedged against higher interest rates, debt costs are still expected to rise slightly. The firm is more constructive on the broader property sector but less so on French offices, with an Overweight rating on Colonial.
Investing.com -- Morgan Stanley analysts said Tuesday that Paris office stocks face competing pressures, with inflation-driven rent growth likely to be counterbalanced by weakening economic conditions and rising vacancy rates.
The firm noted that an expected inflation spike from higher oil prices in 2026 should lead to stronger rent indexation in 2027 and 2028, supporting revenue growth for office companies. However, analysts warned this benefit will likely be neutralized by weaker economic growth, which is expected to drive office vacancy rates higher.
Morgan Stanley also pointed to negative reversion pressures, as the gap widens between passing rents, which are tied to inflation-driven indices, and market rents, which are determined by supply and demand dynamics.
The outlook for Paris offices remains uncertain, according to the firm, with sustained low take-up and supply at record highs. Capital values continue to decline, and transaction volumes remain low. While asset values in central Paris appear more resilient, unconfirmed press reports suggest significant value declines for several assets being sold in La Defense.
On debt costs, Morgan Stanley said most continental European companies have implemented hedging strategies to limit the impact of higher interest rates, keeping average in-place cost of debt below 2% for many. The firm is forecasting a 2 basis point annual increase in average debt costs compared to previous estimates, driven by higher marginal financing rates.
Morgan Stanley also highlighted risks from artificial intelligence disruption, noting that AI efficiencies are likely to affect employment and office space requirements, though the extent and timing remain uncertain.
Despite being bullish on the property sector overall, Morgan Stanley said it is less constructive on French offices. Within the subsector, the firm has an Overweight rating on Colonial, citing expectations for the strongest earnings per share growth.