LONDON—Avison Young says London's real estate markets performed well in 2014 and that the market will continue to expand in 2015 and beyond. The Canadian-based firm last week released its Annual Review and Forecast for major cities in markets where it does business.

London's position as a world city has insulated it from the poor economic environment in continental Europe, and the city's economy was expected to grow by 4.2% in 2014, and then slowing down to 3.4% in 2015. The report puts it this way:

It is expected to expand by a further 15% over the next five years to 2019. The challenge for London, therefore, is how to manage this growth both now and in the future.

All sectors are perfomring well in London, Avison young says.

Office

In 2014, London recorded its highest level of office leasing activity since 2007. The main submarkets all saw take-up levels in excess of long-term averages. Across the main user groups, demand is being driven by growth rather than consolidation, with technology, media and telecommunications the most active sectors.

With the absence of completed space, occupiers are signing preleasing agreements. It is estimated that half the space currently under construction has been preleased. Looking further out to 2016 and using long-term average take-up as a benchmark, only half the required supply of new space is likely to be constructed. Rents rose by 7% in 2014. Continued, and even stronger, rental growth is expected throughout 2015. As a result, many occupiers will have to review what jobs must be London-based or could be moved to cheaper locations.

Retail

London's prominence as a major tourist destination and the expected increase in visitors from China and the Persian Gulf, due to the relaxation of visa requirements, will support consumer spending and maintain retailer demand for space. Central London continues to experience a chronic shortage of flagship stock on the prime pitches of Bond Street and Oxford Street. Although prime retail rents are now around $1,889 (£1,250) per square foot annually, this level is still lower than those in New York, Hong Kong and Paris.

Retailers are also increasingly expanding into office space above their existing stores to add space without drastically increasing their rent. Salvatore Ferragamo (Bond Street) and Nicole Farhi (Conduit Street), among others, have taken this approach.

Industrial

Overall, industrial demand has been steady, and the level of take-up for 2014 was similar to that of 2013. There will be falling supply but, with relatively low levels of speculative development, rents are likely to rise. Developers are adapting to the new market conditions. DP World Gateway is reworking its master plan for a 9.3 million square foot logistics park east of London. The plan is being revised to create a cluster of “small” (80,000-sf to 200,000-sf ) buildings that can be delivered quickly on a design-build basis.

Into 2015, the trend of preleasing distribution facilities will likely continue. In the smaller size ranges, tenant inducements will likely continue to shrink as rents increase and, significantly, lease terms move back in favor of landlords.

Investment

Domestic and overseas investor demand remained high in 2014. Both groups have been attracted by the rental growth seen across all of London's office submarkets. At the end of 2014, the preferred bidder for the Gherkin Building (516,000 square feet ) was a Brazilian investor group. The $1.07B (£710M) bid reflected an initial yield of 3.8% - a low yield for such a large lot size.

Looking forward into 2015, investor demand is expected to remain strong, and continued headline-grabbing acquisitions of trophy assets are also expected. Away from the headlines, there will likely be steady growth in investor interest in the U.K.'s