London Office Market Insights Q4 2024

London's office vacancy rate has reached 10.5% in late 2024, the highest level in two decades. This increase reflects a combination of subdued demand and a surge in new supply. While leasing activity has improved since Q1 2024, demand remains below pre-pandemic levels, and new construction continues to outpace absorption. Around 15.6 million square feet of office space is under construction, much of it expected to be completed in the near term, further pushing vacancy rates upward.

Average rents are softening across the city, with rent-free periods remaining elevated. However, prime, high-quality spaces—particularly in new builds close to key transport hubs—are holding their value better. Record rents have been achieved in areas like the City and Mayfair, driven by firms upgrading to modern, sustainable offices to attract talent and meet environmental standards. Despite many companies reducing their overall footprints due to hybrid working, the demand for top-tier, energy-efficient buildings remains strong. For example, HSBC plans to halve its office space in Docklands by 2027 but has pre-leased a significant 556,000 square feet in the City.

The investment market remains sluggish, with total transaction volumes well below the 10-year average. Higher borrowing costs and a disconnect between buyer and seller pricing continue to weigh on activity, especially for larger deals. Nevertheless, there are signs of gradual recovery, with interest concentrated in redevelopment opportunities and properties in vibrant submarkets like the West End. Properties with conversion potential—for residential or hotel use—are increasingly in demand, reflecting evolving market dynamics.

Submarkets are performing unevenly. The West End is the standout, with lower vacancies and rising rents, buoyed by its thriving social and retail scenes. In contrast, areas like Docklands and West London face vacancy rates exceeding 15%. Space near mainline railway stations is in high demand, reflecting a shift in preference for shorter commute times, with vacancies near these hubs significantly lower than the London average.

Development activity is robust, with new construction peaking in 2024. The City remains a focus, home to London’s largest speculative office projects. The West End, too, has seen significant redevelopment, with department store conversions leading the way. Many landlords are favouring refurbishments over new builds to cut costs and reduce environmental impact. The office-to-residential conversion trend is also accelerating, dampening the net impact of new supply.

Economically, London is recovering, with GVA growth projected at 1.4% in 2024 and 1.9% in 2025, outperforming the UK average. Employment growth has slowed from the sharp increases seen in 2023 but remains positive, particularly in office-based sectors like professional services and technology. However, physical office occupancy remains below pre-pandemic levels as hybrid working has become entrenched.

Looking ahead, prime, sustainable office spaces are expected to outperform in an otherwise challenging market. The flight to quality will likely drive continued demand for high-end developments, even as broader rent levels decline. London's global reputation as a hub for finance, technology, and creative industries ensures its long-term competitiveness despite current headwinds.

London's office investment market is gradually regaining momentum following an unusually quiet half-year period, with approximately £1.6 billion transacted in Q3 2024. While this figure represents a 35% increase compared to the previous quarter, it is still less than half the 10-year quarterly average of £3.8 billion. The number of buildings under offer has risen sharply in recent months, but a significant recovery in investment volumes is widely expected only in the second half of 2025.

Persistently high borrowing costs and a disconnect between buyer and seller pricing continue to hamper activity, particularly for larger transactions. In December 2024, Blackstone abandoned a £300 million deal for the Can of Ham office building in the City of London after Nuveen declined to lower its £322 million asking price. Remarkably, the first three quarters of 2024 saw no deals exceeding £100 million in the City—a first for this century. While yields have stabilised after a significant upward shift during the downturn, hopes for further interest rate cuts are stalling some deals as owners anticipate higher valuations in the future. Examples include the paused sales of 5 Churchill Place in Docklands and 20 Old Bailey in the City.

East Asian investors, historically prominent players in London’s office market, have shifted to become net sellers. Several high-profile transactions illustrate this trend: Chinese Estates sold 14 St George Street in Mayfair for £125.4 million, while the Langham Estate sold the Lotus portfolio in Noho for £300 million. Both sales were to New York-based hedge fund Elliott Management, underscoring growing American interest. Other notable sales include Lai Wing-to's disposal of 291 Oxford Street to J.P. Morgan for £70 million and the ongoing listing of CC Land's Vodafone headquarters in Paddington. Higher domestic interest rates and challenging economic conditions are driving this East Asian divestment wave.

American investors are capitalising on current conditions, leveraging relatively low prices to secure value-added and redevelopment opportunities. UK institutions are also re-entering the market, as demonstrated by Legal & General's October 2024 acquisition of 38 Finsbury Square—a vacant building near Liverpool Street Elizabeth Line station—for around £20 million.

Recent standout deals have emphasised redevelopment potential, aligning with the "flight-to-quality" trend. Developers Edge and Mitsubishi acquired a prime site on Shaftesbury Avenue for £148 million, significantly below its 2018 sale price of £267 million. The West End, especially submarkets like Noho and Soho, continues to attract opportunistic investments, driven by its proximity to Elizabeth Line stations. A notable transaction involved Lothbury and Japan's Nomura purchasing a 50% stake in The Fitzrovia development via a £180 million forward-funding deal, marking increased Japanese interest in London’s property market.

Properties with conversion potential are particularly sought after. For instance, Diageo's former West London headquarters was purchased for £21 million with plans for an office-to-hotel conversion. Similarly, Royal London committed £192.5 million to redevelop 1 Triton Square in Noho into a life sciences facility in collaboration with British Land.

Overall, the investment market shows signs of recovery, driven by strategic repositioning, value-add plays, and the enduring appeal of London’s prime locations. While challenges remain, particularly for less competitive submarkets, the flight-to-quality trend and sustained interest in redevelopment opportunities suggest a pathway to renewed vibrancy.

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