(Bloomberg) -- Blackstone Inc. has aborted a plan to sell a Canary Wharf office building as fears about the future of the district weigh heavily on buyer sentiment. 

The private equity firm was in negotiations to sell Cargo at 25 North Colonnade, which is the new home of BP Plc’s oil trading unit, to an Asian investor late last year but that deal has now collapsed, people with knowledge of the process said. Blackstone now expects to hold on to the building until sentiment improves, the people added, asking not to be identified as the process is not public. 

“This is a modernized, fully leased office building and we are not forced sellers,” a spokesperson for Blackstone said in a statement.

It’s the latest sign of how fears about the future of the district are weighing on some investors in the wake of decisions by major occupiers including HSBC Holdings Plc and law firm Clifford Chance to vacate in favor of more central locations. Making matters worse is a grim picture for commercial property worldwide.

The cost of upgrading the large office buildings typical of the district and uncertainty about the depth of future demand are discouraging investors from buying even buildings with long leases, let alone those that are vacant. A building that’s currently leased to JPMorgan Chase & Co., 5 Churchill Place, is close to selling for a price that’s more than 60% lower than it was bought for in 2017, two other people said. React News earlier reported the sale. 

Just four investment deals have taken place in the docklands since the beginning of the pandemic, according to data compiled by CoStar. Still, some evidence is emerging of enduring demand for space in the area. 

Morgan Stanley — having scoured London for alternatives — is close to confirming it will stay put in the district beyond the term of an upcoming break clause in its lease, two other people said. Spokespeople for Morgan Stanley and Canary Wharf Group declined to comment. 

That follows a decision late last year by Barclays Plc to extend the lease on its headquarters, albeit having paid to get rid of surplus space in another Canary Wharf office. Revolut has also recently signed a deal to take a new office at YY London, the former headquarters of Thomson Reuters Corp. that’s been redeveloped by Oaktree Capital Group LLC and Quadrant Estates. 

Comprehensive Refit

Blackstone bought Cargo which was previously known as 25 North Colonnade, the former headquarters of the Financial Conduct Authority, for about £165 million ($208 million) in 2014. It spent more than £100 million comprehensively overhauling the building, according to a sales brochure seen by Bloomberg News. The terms of the proposed deal involved selling the building for a yield of more than 7%, or a multiple of more than 14 times the annual rent it generates, the people said. 

That would have equated to a price in the region of £270 million, allowing Blackstone to broadly recoup its costs but with little if any potential profit. And that’s for a brand new building that is fully leased to tenants with strong credit ratings and sits directly next to an Elizabeth line station, a new railway that provides the fastest connection between Canary Wharf, central London and Heathrow.

“Vacancy at Canary Wharf is approaching 20%, that would give pause to any buyer looking at even the best assets there,” Adam Shapton, an analyst at Green Street, said. “This is a building that’s still likely to be surrounded by vacant and older buildings for the time being at least.”

A sterner test of investor appetite for buildings in the area will hit the market shortly. 

The fixed-charge receivers of 20 Canada Square, another building that was owned by the same Chinese former owner of 5 Canada Square, are preparing to sell the building, two other people said. It was the former home to BP’s oil traders before they moved to Blackstone’s Cargo and their lease, together with that of Standard & Poor’s, has yet to expire. 

Receivers at Alvarez & Marsal are in the process of negotiating a surrender of those leases, betting that marketing the building as vacant could draw more interest because it would provide a developer a clean start on repositioning the property, the two people said. 

Canary Wharf Group has been focusing on luring life sciences companies to buildings, filling space once the preserve of the city’s financial giants with labs. Brookfield and the Qatar Investment Authority committed £400 million to the group in October of last year, earmarked to aid a strategic shift to life sciences as well as adding residential buildings. 

Alvarez & Marsal declined to comment.

(Updates with analyst quote in 11th paragraph.)

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