July 7, 2025 by Mike Phillips

The London Office Market Is Back, Baby

It is understandable, given the context: a pandemic that turned offices into a scene from a postapocalyptic film, eerily empty for months. But never has sentiment toward an asset class plummeted as fast as it did with offices. 

Given the huge importance of the office market as the largest real estate sector, and with the destruction of value in retail fresh in the industry’s memory, fears and pessimism over the fate of office ran rampant. 

But in London at least, it looks like that opinion is now out of date. 

Photo: Bisnow/created with assistance from ChatGPT

“Everybody was trying to explain a drop in office values with something structural,” Castleforge Partners founding partner Michael Kovacs said. “It must be work-from-home, right? I think we might wake up in a couple years and realise that cycles are just what happen when five-year money goes from 0% to 4% overnight.”

A confluence of events more than a decade in the making hobbled the office market. The Brexit vote, the coronavirus pandemic, the Ukraine war, Liz Truss’ economic radicalism, the price of your shopping, confusion over how much space a human takes up in an office and the psychology of investment in a volatile environment have reshaped the sector, but now many of those factors are feeding in to what is becoming an increasingly sustained recovery in both office leasing and investment. 

There is still a huge amount of vacant office space, but leasing levels are OK and rents are spiking in many districts. For the first time since the start of the pandemic, even Grade B rents are rising, sharply in some cases. 

And when rents rise, especially after prices have fallen, investors start licking their lips. First, private investors started buying, then the private equity firms and braver listed companies, and now pension funds and insurance companies are starting to dip their toes, presaging a full-scale recovery of the investment market.

“No one's smart enough to hear the bell, but it definitely rang last year at some point as we hit the bottom,” Great Portland Estates Executive Director Dan Nicholson said. 

The key to the recovery is economics 101: supply and demand. Office supply has been hindered in most countries over the past few years, but the UK’s falloff goes back further, as a series of unfortunate events meant that the post-Global Financial Crisis boom in real estate values was not accompanied by a wave of office building. 

The effects of the 2008 crash kept property companies risk-averse for many years, and then, just as appetite was coming back, along came Brexit, with accompanying questions about demand from financial services companies in particular. 

Just as the market was realising that Brexit’s impact would be minimal, Covid-19 landed, creating an existential crisis in offices. 

Then came the February 2022 Russian invasion of Ukraine, which, along with the pandemic, stoked inflation, driving up the price of materials and labour. These remain elevated today, making development hugely more expensive. 

Inflation had already caused central banks to start raising interest rates, but that process was catalysed by Truss’ disastrous 2022 budget, which caused UK rates to spike to the highest level in 20 years. Investment volumes and real estate prices dropped by 20%-60%, depending on how good your asset was — not a great environment in which to build. 

The pipeline, especially for spec space, is expected to remain meagre for years to come. Just over 8.5M SF of offices are scheduled to complete this year, a 22-year high, according to Deloitte — but 41% of that was already leased before the year started. Just 3.5M SF is scheduled for completion next year. 

“It is just clear that supply of high-quality space in the best locations will be substantially lower than the demand for that space over the next few years,” GPE Head of Investment Alexa Baden-Powell said.

GPE has taken advantage and bought £162M of assets in the past 18 months, and it will spend about the same again to improve them and try to push rents.

Photo: Bisnow/Mike Phillips

HSBC's new City HQ may be too small for the staff it needs to house.

Supply is unevenly distributed. There is 24M SF of London office space available, according to data from Devono, putting the capital’s vacancy rate at about 9% — both figures higher than the historical average. 

But some of that space is essentially impossible to lease and can be discounted from the stats, Devono Head of Insights Shaun Dawson said. They are poor-quality buildings in secondary locations just waiting to be converted to other uses or at the very least refurbished.

And there are certain districts, like Fitzrovia and Mayfair, where vacancy is less than 1%. In the City, vacancy is 7% overall but 3% for Grade A space, with the overall figure dropping 10% in the quarter, BNP Paribas Real Estate data showed. 

“The smaller pockets within the bigger market can be functioning very differently,” Derwent London Executive Director Emily Prideaux said. “If you're looking for 10K SF in Mayfair versus 10K SF in White Chapel, you are in a completely different marketplace.”

And demand is slowly but steadily recovering. There is 12.6M SF of active tenant searches in the City, Midtown and West End, JLL reports, about 20% above the 10-year average. And of that, two-thirds of firms in the market will only lease prime space. 

The UK economy is growing sluggishly, but new businesses are forming and existing businesses are in many cases expanding — an eye-catching example being Squarepoint, an asset manager that a decade ago was relatively unheard of in London but earlier this year leased the entirety of J.P. Morgan Asset Management’s 400K SF 65 Gresham Street.

While long-term planning for real estate remains a tricky process — the debate on whether artificial intelligence will reduce headcounts and office requirements is for another day — for now, the uncertainty about whether the impact of working from home would permanently reduce office usage seems to be somewhat settled. 

“We're well past that. That feels very much in the rearview mirror,” Prideaux said.

Transport for London data shows that transport usage remains about 10% below prepandemic levels, and office utilisation data from Remit Consulting also shows office usage on average more than 25% down from before the pandemic. 

But while some companies have shrunk office space because staff are happily working remotely more often without any impact on productivity, many have staff coming to the office with a frequency that means office requirements remain the same or even need to grow. If everyone is in even three days a week, you typically still need the same amount of space. 

“There’s a dilemma for tenants who think they can reduce their footprint,” Devono’s Dawson said. “When, in reality, you start talking about their hybrid working policy, how they want to use office space, what they need in there, suddenly you're talking about expanding that space.”

The highest-profile example today looks like it will be a cautionary tale from real estate brokers for the rest of time. HSBC is moving from a 1M SF HQ in Canary Wharf to a building about half the size in the City, but the global bank is now looking for extra office space because it won’t be able to accommodate all its staff in the new building.

Companies are struggling to work out how much space they need once you factor in the new levels of breakout and amenity areas, Dawson said, and are finding that even if you have fewer desks, your overall office size hasn’t reduced. It is the kind of calculation those tasked with deciding office usage can easily get wrong in an uncertain new world, as companies like HSBC are finding out. 

Photo: Courtesy of Alexa Baden-Powell

GPE Head of Investment Alexa Baden-Powell

As companies recalibrate, leasing is accelerating. Central London office takeup was 10.5M SF in 2024, data from BNP Paribas Real Estate showed, down on the 12.3M SF leased in 2019, but not dramatically so. And coupled with that lack of supply, rents in some areas are skyrocketing.

Average Grade A rents in Mayfair and St James’s are now £190 per SF, Devono found, and rents for the best buildings are above £250 per SF. Rents in the district have risen 58% in the past five years. 

There are now six areas of London where average Grade A rents top £100 per SF — once the sole preserve of Mayfair — including previously unfashionable King’s Cross. 

GPE, whose portfolio is concentrated in the West End, is expecting 6%-10% rental growth this year, given the lack of supply, and the company doesn’t see the space shortage getting any less acute in the near future, especially in the face of restrictive planning policy from Westminster Council. 

Average Grade A rents in the City are now £95 per SF, Devono said, and space in the best towers rents for £115 per SF. That is a 36% increase in the past five years. 

The recovery is also broader-based than was expected a year ago, when only the best-of-the-best buildings were leasing up.

Over the past five years, average secondary rents are up 30% in the City core, 29% on the South Bank, 24% in Mayfair and 26% in Fitzrovia. Secondary space has suffered in some districts — Grade B rents are down 20% in Canary Wharf and 11% in Hammersmith. But even outlying locations like White City and Stratford have seen growth of 7% and 8%, respectively. 

“When we talk about the increase in Grade B, we're talking about the prime Grade B, the better-quality assets that are out there,” Dawson said. “But that is purely because it's a trickle-down effect from the Grade A. Landlords are confident that businesses want good-quality space, regardless of whether it's five or 10 years old.”

Rent as a proportion of total costs for occupiers has dropped from about 40% in the 1980s to less than 10%. The figure is used to justify the argument that corporates can afford to pay more for space.

But not every company can, or wants to, pay millions of pounds in rent and fit-out costs moving to a swanky new office, as London has the highest office fit-out costs in the world. So a broad increase in secondary rents is being driven by companies happy to stay put and pay a rent that is higher but at a discount to what they would pay in a new building. 

“Employees are largely back in the office, so businesses are asking the vital questions,” Castleforge’s Kovacs said. “You're telling me that I have to give everyone bells-and-whistles buildings in order to actually attract employees? Some businesses do, and some can afford it. If you're a law firm making £4M per partner, sure.

“But for other business — most businesses — how on earth can you afford to pay what a law firm can pay on rent and fit-out expenses?”

For that reason, Kovacs is less bullish on a continued wide-ranging increase in Grade A rents but is more confident about the prospects for Grade B.

“I think you’ll see B-quality building rents and A-quality building rents converge, like they do between the start and end of every cycle,” he said. 

The central London office investment market is not yet zipping along with the same momentum as the leasing market. But when rents rise, investors inevitably start buying. Early movers have already put significant amounts of cash into the market, and some traditionally conservative investors are starting to buy as well. And it is not just for the very best-quality buildings. 

“Bid processes recently on buildings which aren't brand new but are pretty new have been massively hotly bid, basically on the thesis of rental growth,” GPE’s Baden-Powell said. 

Photo: Bisnow/Mike Phillips

Castleforge's Michael Kovacs

First movers included Ares Management, which has bought nearly £300M of London offices in the past 18 months in the West End, Midtown and the City, and at prices you would not normally expect to see a private equity firm paying. 

Its £135M deal for the 60K SF 45 Pall Mall represented a yield of 4.3% and a capital value of £2,668 per SF. Not a hint of distress in sight, and the deal could provide value-add returns given rents in the building are high but below the new average for the area.

JPMorgan Chase has also been a buyer, Blackstone tried and ultimately failed to buy the Can of Ham in the City, and specialists like GPE have been putting money into the market. 

And now they are being joined by investors with a lower cost of capital, and often buildings are being fought over by groups of very different types of investors. 

A good example is 11-12 Hanover Square, a 47K SF office building with retail on the ground floor in the heart of Mayfair developed by Aviva Investors and Canadian pension fund PSP Investments. 

It was bought for £170M by Delancey and Aware Super, a joint venture looking to buy core-plus offices, with the price representing a 3.85% yield, a recent low yield — meaning high price — for a London office building. 

Bidders included Ares and JPMorgan, property company Brockton Everlast, Canadian pension fund Oxford Properties and UK pension funds Royal London Asset Management, Legal & General and M&G. 

The building is 8 years old, so new, but not brand new. So while it isn’t super prime, the expectation is that rents will still grow strongly. 

All the parties bid at around the same levels. Value-add investors like Ares need a higher return but are factoring in more aggressive rental growth, whereas a pension fund won’t factor in the same growth levels but is willing to take a lower return. 

The past three years have been exceptionally dismal for central London office investment — the £6.4B invested in 2024 was the lowest annual figure this century, MSCI data showed. 

But this growing depth of investors should spur an uptick this year, with the greater liquidity encouraging owners to bring assets to the market, including the larger buildings that have proved particularly hard to shift. 

Notable assets for sale include 111 Buckingham Palace Road in Victoria, which Kennedy Wilson is selling for £220M, and the expected disposition of 33 St James’s Square, one of the assets in the recently sold Argyll flexible office business, which was put up for sale a couple of years ago for £92M before being withdrawn.

Many owners of buildings outside the top tier that have been holding on, hoping for values to return so they can avoid losses, will now be encouraged to sell because while yields haven’t compressed, rising rents make things look a lot rosier. 

“What will end up saving a lot of people is that they bought good-quality buildings in good locations off rents of £45-£60 per SF, somewhere in there,” Kovacs said. “And actually, the building rent should now be higher thanks to inflationary pressures. So even if the cap rate has gapped out, the rent has risen, and on a pound-per-square-foot basis, you're OK.”

Kovacs said buying good but not great office buildings presents a compelling investment proposition. It won’t take a huge shift or an existential change in the way we view offices, just good real estate skills. 

“I actually think that there's going to be an opportunity to do pretty cost-effective refurbs on B-quality buildings that are in A-quality locations, retain tenants, extend leases and just do good old-fashioned real estate asset management,” he said.