Can't Pay, Won't Pay: Sticky Occupiers Could Shift Away From Best Offices As Rents Rise

London’s constrained office development pipeline is beginning to sharpen minds among occupiers about their office strategies — and the heralded flight to the best-of-the-best office is not a given as rents ramp up.

With new development running well behind increasing demand in the capital and rents already elevated and climbing, location has reasserted itself as the defining factor in occupier decision-making.

And those that would have looked at Grade A-plus offices may be prepared to compromise amid soaring rents, with staying put looking increasingly appealing.

"There is certainly demand out there, but supply has a much bigger impact on rents than many expected," Castleforge founding partner Michael Kovacs told an audience of more than 300 at Bisnow’s UK Office Series: Investment and Development Conference in London. "The fact that there has been no building will ultimately impact tenant choice."

Leumi UK Relationship Director Nick Westoby said the sheer cost of occupying best-in-class space, particularly if reviews see those rents rising dramatically, could prompt some tenants to reconsider their strategies and move away from focusing on state-of-the-art office space and look at second-tier buildings sitting just below the very top of the market.

"Tenants are looking at these assets to pay below the very top rents, even if the space requires some refurbishment," Westoby said.

"That probably means Grade A, A-plus rental growth might slow down if tenants accept not quite the best of the best."

For investors, that means focusing on second-tier buildings just below the best could be a profitable strategy. There may be an assumption that major refurbishments would be required, but to keep rents down, they may require less intervention.

Delancey Head of Investment Dan Dawe said his firm is committed to the London office sector and had stabilised around £500M across three office transactions in 2025 via a joint venture with Australian pension fund Aware Super.

The JV is targeting buildings capable of driving cash flows and outperforming the market. Dawe's focus remains squarely on buildings with "large floor plates, amenity and location," with the City chief among attractive locations.

"There's a deep occupational market, and occupiers are willing to pay for the best," he said, although he highlighted a growing "stickiness" of incumbent occupiers, meaning the tendency of tenants to remain in high-quality buildings rather than churn.

Dawe described this as "a real benefit to investors" because of the stability of income, and he said it was reshaping how landlords think about lease structures and cash flow. 

"Capital flows are increasing, but in quite a narrow geography [around London], and investors have to be cognisant of location regarding their exit or if the building is not quite right," he said.

Delancey's acquisitions are focused on cash flow and high levels of liquidity of around £100M to £200M, but there is an interesting opportunity with larger lot sizes, he said.

"Think about the City: large floor plates, amenity, locations and a deep occupational market, with some willing to pay for the best and looking at high rents as a rounding error," he said.

The situation shows few signs of change. Great Portland Estates Head of Investment Alexa Baden-Powell said that with costs rising again because of inflationary pressures, fewer developments might go ahead. As a result, rents may go up in an already overheated market.

"Supply is already not keeping pace with demand, though what happens to secondary stock remains to be seen," she said, pointing out that fit-out costs are also amplifying the pressure on occupiers and shaping their decisions because of the overall cost of moving. "It remains to be seen regarding secondary. We would always prefer to buy a B office in an A-plus location."

Baden-Powell also raised the question of upward-only rent reviews, calling the current regulatory framework changes "a sledgehammer to crack a nut." She said it was a provision designed for retail that has been awkwardly applied to offices. She anticipated a shift toward index-linked rents, as has occurred in Dublin, which she said "might give investors more certainty."

Kovacs said that for occupiers looking for less than 10K SF, flexible and delivered space is dominant, and the return-to-office debate has had virtually no bearing on decision-making.

"We haven't even heard return to work talked about. It's not affecting any tenant decision-making at this size," he said, adding that with occupation so strong, investors need to stop worrying about their exit strategies and focus more on income.

"If you are able to pick up buildings with a margin for error, then uncertainty makes less of an impact. And if you can fill the building at a great rent, why does liquidity matter?"