Commercial Quarterly Examiner – office market update Q1 2025

Working from home and the state of the economy continue to be the largest forces shaping the UK’s office market.

Office based economic output rose by 0.24% in Q4 2024 and 1.96% in 2024 outperforming the all-sector economic output of 0.06% in Q4 and 1.42% in the year. Office output has grown at an annualised average of 2.28% since December 2000.

Office occupancy rates across the UK have reached their highest point since the beginning of the pandemic, according to Remit Consulting, hitting an average of 37.8% in March 2025. This may appear a modest achievement, but the British Council for Offices (BCO) has previously suggested 60% as a realistic benchmark after allowing for
annual leave and external meetings.

Central London offices Occupational view
Central London office availability is still increasing. It rose by 4.4% in Q1 2025 to 31.6 million sf; the highest level for at least ten years. Across the Central London office market vacancy rates are 12%. But this varies by sub-market. West End vacancy rates are 9% and the City vacancy rate of 12.4% drops down to 7.7% for the very best buildings typically called “Grade A”. In Mayfair the Grade A vacancy rate is as low as 2.5%.

Net absorption across all Central London office markets has been positive for each of the last three quarters meaning that more property has been let than come onto the market. This is normally indicative of a strong or improving
market conditions. But a large amount of space coming onto the market through development completions can increase availability and push up vacancy rates.

In the last twelve months more than 2 million sf of new office development has been completed. Only 200,000 sf was completed in the West End but more than 1.6 million sf of completions were in the City and City Fringe
sub-markets.

Many of the largest buildings completed in 2024 or due to be delivered this year are fully or substantially let including Google’s new 860,000 sf UK headquarters building in Kings Cross and 38 Berkeley Square, where Chanel
have taken a pre-letting of all 83,000 sf for their London headquarters. The largest substantially vacant development due to complete this year is One Olympia on the former exhibition centre site in Hammersmith previously owned by
Capital and Counties. A consortium including Deutsche, Yoo Capital and investors from the Middle East have developed 550,000 sf of office space with a live music venue, a gym, performing arts theatre, conference facilities,
hotels, restaurants and bars.

The more plentiful supply of this key product in the City means that headline rents are £85 psf, whilst in the West End they are at £137 psf.

The emergence of Cat A+ offices has enabled landlords to demand a premium rent for a turnkey product that has been fully fitted out with desks, meeting rooms and IT. These premium rents may be disguising some of the falls in
average rents for mid-tier stock.

Investment view
Central London office investment markets have been improving since mid-2023 but only in the sense that the rate of decline in capital values has been slowing. Since commercial real estate markets first turned down in 2022 capital values have fallen back 25.8%. However, over a 12-month horizon Mid Town and West End capital growth turned positive for the first time since Q4 2022.

Blackstone, the world’s largest alternative investment manager has rarely bought offices over the past decade and has regularly cited that office make up only 2% of its real estate portfolio. Earlier this year, however, the asset
manager called the bottom of the market for high-quality, well-located office markets and has reportedly been negotiating the purchase of 70 St Mary Axe known as the “Can of Ham”, an iconic 21 storey City tower completed in 2019. Although Blackstone offered a sum more than the £322 million asking price, Nuveen have chosen to retain
the building encouraged by signs of a market recovery.

Disregarding a recent political trend to undermine the green agenda and “net zero” targets, IJM, a Malaysian conglomerate, paid £72.5 million for 25 Finsbury Circus, a Grade II listed Edwardian office. It plans a £150 million sustainability-focused refurbishment which will provide 251,000 sf of net lettable space and aims to reduce embodied carbon and construction waste. The buildings design includes underfloor air distribution systems, heat pumps, energy-efficient lifts, LED lighting, modular green walls, and Sustainable Urban Drainage System (SuDS)
while preserving the building’s architectural heritage. Simmons & Simmons have taken a 20-year pre-let of 62% with an option to expand up to 80%.

Rest of UK offices Occupational view
Availability across all Rest of UK office markets has fallen by -1.2% in Q1 2025 but increased by 4.4% year-on-year. In the South East and Eastern regions availability increased by 1.7% in Q1 and 8.0% y-o-y.

Vacancy rates across all the “Big 6” regional office markets range between 8% in Leeds and Edinburgh and 12% in Manchester. Although vacancies have been increasing y-on-y they have fallen in Q1 in all major regional markets
except Birmingham.

“Big 6” market rental value growth has slightly increased to 2.6% in the year to March from 2.5% in the year to December 2024. In Bristol rents have grown by more than 4% y-on-y. Outside the major regional centres office rents
continue to drift.

Completions of prime new office space in the South East and Rest of the UK are limited. In the last ten years an average of 53 buildings comprising 1.6 million sf have been completed every quarter. In Q1 2025 just 14 developments completed with just 725,000 sf.

The Pilgrim’s Quarter office development in Newcastle’s Pilgrim Street regeneration area is the largest office development under construction in the UK’s regional office centres. The building incorporates the preserved façade
of the Grade II listed Carliol House, an Art Deco structure originally built between 1924 and 1927 and on completion in 2027 will provide 463,000 sf accommodating 9,000 staff in HMRC’s largest regional hub.

The largest regional speculative office scheme is a re-purposing of the Rylands Building, in Manchester’s Market Street. It was originally constructed in 1932 as a warehouse and later became a Debenhams department store until
its closure in 2021. The Grade II listed Art Deco building is undergoing a comprehensive refurbishment to become a modern mixed-use development with 298,000 sf of office space and 70,000 sf of ground floor retail and leisure.
The design includes staff changing and shower rooms, an exercise studio, a wellness suite, and secure cycle storage located in the basement.

Investment market
The regional office investment market enjoyed a strong last quarter of 2024 when investment volumes reached £568
million and exceeded the ten year quarterly average of £664 million. Bristol, Leeds and Manchester were the recipients of 70% of this inward investment. However, investment volumes in Q1 2025 totalled just £91 million,
representing the weakest quarter in the last ten years.

The average total return performance across all “Big 6” centres turned positive in Q1 2025 over both three months and 12 months. Total returns for the year to March increased to 0.9% from -2.3% in the year to December. Nevertheless, capital values still decreased by -5.7%.

Average office investment yields for Big 6 and South East offices are finally stabilising. Big 6 and South East office equivalent yields hardened by 19 bps and 2 bps respectively in Q1 2025. But investors are still engaged in a
process of price discovery.

The Mint on Sweet Street in Leeds South Bank area offers 118,000 sf of office space on eight floors completed in 2009. It is let to Jet2 Plc for a term expiring in January 2033 with a tenant break option in January 2029. The building was marketed for sale with an asking price of £24.5 million and sold in February this year for just £16 million reflecting a net initial yield of 16%. The asset had previously sold in 2015 for £30 million and again in 2019 for £42 million.

The Brinell Building, a Grade A 65,000 sf office development located on Station Street in Brighton’s North Lane area, was completed in 2019. It has BREEAM “Excellent” and EPC “A” ratings. The building is fully pre-let on record rents for Brighton at up to £32.00 psf. In 2019 the building was sold to Orchard Street Investment Management on behalf
of St James’s Place Property Unit Trust for £39 million, reflecting a yield of 4.75%. In March 2025 the building was sold to French real estate fund, Iroko Zen, for £27 million, representing a 7.5% yield as part of the £1.84 billion winding up of St. James’s Place open ended property funds.