Markets reprice AI risk – real estate included

US stocks fell sharply yesterday as concerns about the scale of planned AI investment morphed into a broader reassessment of which sectors could be left exposed as adoption accelerates.

Anthropic's release of a tool intended for use by companies’ legal departments set hares running last week, prompting a sell off of shares in publishing and legal companies. Wealth managers got similar treatment earlier this week when start-up Altruist released a comparable tool. Trucking and logistics followed, and by late yesterday shares in commercial real estate services firms began falling.

For legal, wealth management and logistics firms, the concern is that cheaper AI tools will erode margins. For commercial real estate, the issue is partly about margins, but it's more driven by whether AI-driven layoffs across white-collar sectors could ultimately weaken demand for office space. 

At the table

"A sell-first, ask-questions-later mentality... has rapidly taken hold," Bloomberg's Matt Levine wrote last week. This is understandable, given the uncertainty around how quickly models will improve and the extent to which they will enhance productivity or replace roles altogether. Analysts interviewed by the likes of Bloomberg and the FT think the sell-off is overblown: 

"At the end of the day, these are interpersonal transactions, they’re at the table negotiating," Joe Dickstein, an analyst at Jefferies, told the FT. "The idea that we’re each going to have our own AI broker agent negotiating with each other is a little ludicrous to me.”

It is too early to draw firm conclusions about the long-term implications of AI adoption for office demand. However, Knight Frank’s surveys of investors and occupiers provide a clearer view of the medium-term outlook – and those with the most at stake remain more focused on scarcity than obsolescence.

Of the nearly 300 senior corporate real estate leaders surveyed as part of our (Y)OURSPACE 2025 series, half expect the total space in their portfolios to increase over the next three to five years. About 30% are expecting no change. Meanwhile, our Active Capital survey of 119 global investors overseeing $1.4 trillion of assets, published last month, shows offices are now the most targeted commercial real estate asset class, with 69% of money managers looking to buy.

Increasingly optimistic

A slow and steady recovery appears to be taking hold in the UK residential market. The new buyer enquiries metric in the January RICS survey of estate agents registered a new balance of -15%. That's pretty subdued but is up from -21% in December and -29% in November. 

Similarly, agreed sales climbed to -9%, which is the least negative reading since June 2025. Near term sales expectations are broadly flat, but respondents are increasingly optimistic about the year ahead. A net balance of +35% expect sales to rise as the year progresses, which is the strongest reading in more than a year. 

New instructions are running pretty steady, though there has been some softening of new appraisals. A net balance of -4% expect house prices to rise in the near term, but +43% of respondents expect values to climb over the twelve month time horizon. That's the highest reading in a year.

Regulatory hurdles

UK residential development land values remained flat through the final quarter of 2025, according to new Knight Frank data. Uncertainty ahead of the November Budget, subdued buyer demand amid elevated mortgage rates, a restrictive planning and regulatory environment, and limited grant funding for registered providers continue to weigh on developers’ appetite for land.

That said, improved sentiment following the turn of the year is driving a tentative recovery in appetite for land. The prevailing view is that Q4 will mark the bottom of the market. Any recovery will hinge on borrowing costs easing further, alongside renewed government efforts to reduce planning and regulatory hurdles and the introduction of a support scheme for buyers at the foot of the property ladder – see Oliver Knight's latest update for more. 

Government policy reforms have so far focused on supply-side constraints, yet they are unlikely on their own to deliver the government’s ambitious housing targets. A more significant increase in output will require deeper reform of the planning system, and homebuilders increasingly view some demand-side support as essential to any recovery:

"Whilst we remain encouraged by the Government's focus on housebuilding and its planning system reforms, accelerating delivery will also require action to support demand, which will ultimately drive housebuilding recovery and create the homes, jobs and economic growth the country needs," Barratt Redrow said in a half-year trading update yesterday. "It is vital that Government policy is focused on creating a positive, stable and predictable environment for both institutional and private homebuyers, as well as homebuilders and our supply chain partners."

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