London Office Market Insights Q1 2024

Physical Occupancy Levels For Offices Still Slightly Below Pre-Pandemic January 2024 - March 2024

Office-based employment in London rebounded by 12% from 2021 to 2023, but physical office occupancy remains below pre-pandemic levels due to the widespread adoption of hybrid-working models. This shift has led to reductions in office footprints by major banks and firms across various sectors, impacting both office space demand and weekday footfall. Despite these challenges, London is poised to maintain its position as Europe's premier hub for finance, insurance, and technology, with American technology and venture capital firms continuing to view the city favourably for its tax advantages and access to global talent.

Office Vacancy Rates Remain Stubornley High January 2024 - March 2024

London's office vacancy rate is increasing once again, driven by negative net absorption and rising net deliveries. Available space on the market has surged by approximately 50% compared to pre-pandemic levels, pushing the vacancy rate to around 9.5%, close to a 20-year high. Despite steady take-up throughout 2023 and impending big pre-lets in spring 2024, further increases in vacancy are expected as new deliveries outpace demand.

Firms are shifting towards higher-quality, sustainable spaces, even as many reduce their overall office footprints due to the rise of hybrid working. Over the past four years, the best-quality buildings experienced positive net absorption in contrast to significant demand losses in lower-rated offices, potentially leading to the removal of older, poorer-quality stock. Activity in the office market is driven by law firms and prime space demand in the City, with notable deals like Kirkland & Ellis securing space at 40 Leadenhall and American hedge fund Citadel in talks for a pre-let at 2 Finsbury Avenue. However, demand from the technology, media, and telecommunications (TMT) sector has subsided, leading to space releases by companies like Facebook and Google. 

Financial firms are also downsizing their office footprints, with examples like Barclays vacating a large building in Canary Wharf. The West End submarkets have shown resilience, with lower vacancy rates and decreased sublease availability, while Paddington has particularly stood out in driving down vacancy rates. However, risks persist, especially concerning the amount of space occupied by WeWork in Paddington, which could have potential consequences if WeWork faces challenges in the future. Overall, the office market in London is experiencing significant shifts in demand and supply dynamics, influenced by changing work patterns and economic conditions. 

The London office market is witnessing rising concessions, which are bolstering headline asking rents and masking underlying softness. Currently, a two-year rent-free period is typical for a 10-year lease across central London, though landlords have more leverage in newly completed buildings and prime locations. Rooftop terraces command significant premiums. Proximity to mainline railway stations is driving demand, with space near key transport hubs experiencing a 17% increase in asking rents over the past two years. However, overall rent growth across central London has been flat. Looking ahead, rising vacancy and weak demand may lead to further rent losses, but prime, sustainable spaces are expected to outperform due to a flight to quality. Despite rising vacancy rates, premium rents have been achieved in select areas like the City of London and Soho. Submarket performance varies, with the West End showing resilience and falling void periods, while areas like the City Core and Hammersmith face potential rent losses. Southbank and dynamic submarkets in the West End and Midtown are likely to fare well due to lower vacancy rates and broad industry appeal. Dynamic non-core areas such as Croydon could also perform relatively strongly.

Office Investment Market Needs An Injection Of Confidence January 2024 - March 2024

London's office investment market remains quiet, with the traditional end-of-year rush of transactions notably absent in 2023. Higher borrowing costs and an ongoing pricing disconnect between buyers and sellers continue to drag on activity, particularly at the larger end of the deal spectrum. Just £5.1 billion has been spent on London offices over the past four quarters, well below the 10-year annual average of £16.2 billion. Average yields have begun to stabilise, however, following a circa 100-basis-point upward shift during the first year of the downturn. 

Growing expectations for several interest rate cuts this year should offer further support to both pricing and deal activity moving forward, too, as could the swifter re-pricing seen in London than in other European gateway cities. The number of buildings under offer has jumped in recent weeks. That said, most market participants expect a meaningful rebound in investment volumes in mid-2024.

Refinancing issues should lead to more distressed sales in the coming months. In February 2024, receivers of Cheung Kei Group sold 5 Churchill Place for £110 million, a 60% reduction on the price paid for the property in 2017. Office values have fallen further in Docklands than in most parts of London amid high vacancy and weak prospects for rental growth. Evidence of the pricing readjustment for core office property in more central areas can be seen in two big deals close to Farringdon Station.

In October 2023, UBS Asset Management bought Bloom Clerkenwell for £230 million at a 5.3% yield, about 100 basis points higher than the nearby Kaleidoscope Farringdon changed hands one year earlier. Pricing appears more resilient, a little lower down the price spectrum, where the buyer pool is larger. A private Spanish investor acquired 8 Bleeding Heart Yard, which is also close to Farringdon Station, from Seaforth Land for £52 million at a relatively keen 4.3% yield. 

Many of the biggest deals recently have had a value-add or redevelopment angle, with some equity-rich investors seeking to take advantage of falling prices and reduced competition from leveraged buyers and with an eye on the flight-to-quality trend persisting into the next cycle. A standout deal in 2023 saw Canada's Brookfield purchase 77-78 Grosvenor Street for £100 million, with the building now set to be renovated after the lease of the building's main tenant—Blue Bay Asset Management—expired in late 2023. Properties with conversion potential have also been sought after. Whitbread Group recently acquired New London House for £56.5 million in an office-to-hotel conversion play.

The vibrant West End submarkets of Noho and Soho have been a key focus for more opportunistic investments, particularly sites close to new Elizabeth line stations. A key sale late last year saw Lothbury and Japan's Nomura buy a 50% stake in M&G's The Fitzrovia development in a £180 million forward-funding transaction as Japanese investors step up their interest in London real estate. Developers Edge and Mitsubishi then paid £148 million for a prime redevelopment opportunity on Shaftesbury Avenue in December, though in a sign of softer prices, the former WeWork building traded for well below both the asking price (£180 million) and the prior sale price (£267 million in 2018). Beyond central London and parts of west London, the focus continues to be on office-to-residential conversion opportunities.