Commercial Quarterly Examiner – office market update Q2 2025

Average UK office occupancy reached a new post-Covid high of 38.1% in the first two weeks of June.

Even though the data from Remit Consulting shows occupancy is increasing, it remains lower than pre-pandemic levels, particularly on Mondays and Fridays, suggesting a shift towards a more strategic approach to office attendance.

Some companies are driving employees back in to the office to strengthen collaboration and culture. For some businesses, however, office attendance has little impact on performance and employers are prepared to take a more flexible approach based on their business model, workforce demographics, and even geography.

Office based economic output rose by 0.66% in Q1 2025 and 1.70% year-on-year (y-o-y) outperforming all-sector economic output growth of 0.41% in Q1 and 0.9% in the year ending in June. Office output has grown at an annualised average of 2.26% since June 2000, outperforming a more broad-based measure of GDP which has grown at 1.50% a year over the same period.

Central London offices Occupational view

• Occupiers are seeking best-in-class, well-located buildings and, as such, record rents are being registered across a number of sub-markets.
• Developers are creating super-prime offices with amenities including terraces, rooftop gardens, and enhanced hotel standard ‘end of journey’ facilities to attract occupiers.

Central London office availability fell in Q2 for the first time since Q3 2023. It decreased by -3.1% to 30.98 million sf which represents 32 months’ supply at the post-Covid average rate of take-up. The occupational market for the very best buildings is even tighter. The availability of the best office space decreased by -8% representing 15 months’ supply.

In the City office market, the availability of Grade A office space fell below one million sf for the first time in at least ten years. Availability of the best space now represents just 7 months’ supply. The market for Grade A office space in the core West End submarkets of Mayfair and St James’s is tighter still. Immediately available supply amounts to less than 50,000 sf and take-up has averaged 91,700 sf per quarter since the start of 2022.

In the last twelve months more than 3.24 million sf of new office development has been completed across Central London. Most of this space was in the City and City Fringe. In the Square Mile and its periphery year-on-year completions amounted to 2 million sf. In Mayfair and St James’s completions amounted to 270,00 sf over the same period. In the next two years five Grade A buildings are scheduled to complete in the City market; all are 100% pre-let. In April investment management firm Squarepoint agreed to pre-let 400,000 sf at 65 Gresham Street, EC2. However, the scheme has not yet started on site and is not due for completion until 2028.

Mayfair and St James’s rents continue to reflect strong demand and limited development, but the levels achieved are being challenged by new occupational deals in the City tower buildings. But a lack of available space in these new towers is driving occupiers to widen their search to include more peripheral locations.

KKR and Fore Partnership have agreed a pre-let of the sixth and seventh floors at Tower Bridge Court to Allfunds, who describe themselves as a global wealth tech company. The £98.75 per square foot rent for the 16,530 square foot space is the highest in SE1 and illustrates the trend of a flight to quality driving prime rental growth. Fore Partnership has created an “urban village hall” on the ground floor, a flexible 3,500 square feet social and cultural space for local community use and markets the building as a net zero Thames-side landmark designed for wellbeing. It has a large terrace and some of the best views in London, and quoted rents on the lower floors range from £79.50 to £87 psf. It also provides a dedicated entrance for cycles, 217 cycle spaces, showers, lockers and e-bike charging.

Developers are competing for occupiers by creating a new category of “super-prime” offices. A refurbishment of St Magnus House, Lower Thames Street, originally completed in 1978, will include terraces on upper floors with views of the Thames, Tower Bridge, The Shard, and London Bridge; a roof garden; first-floor restaurant; and upgraded bike parking. The refurbishment of Adelaide House, King William Street will include a rooftop terrace, riverside gardens, lounge areas, 330 cycle spaces with 330 lockers, showers, a cycle repair hub and e‑charging points. The scheme has just started on site.

Investment view

• Improving market conditions suggest it is now time for the return of investors.
• Driven by hotel room scarcity, obsolete or redundant office buildings are being re-purposed as hotels, but London’s luxury hotel market is experiencing an unfortunate coincidence of falling demand and rising supply from new openings.

The London office market continues to gain strength from a low base. Capital value growth improved by more than one percentage point from 0.37% in Q1 2025 to 1.44% in Q2 representing an annualised rate of 5.9%. In the year to the end of June, capital values rose by 1.26%. But this performance is largely being driven by the West End which has benefitted from growth of 2.03% in the three months to June. In comparison, offices in the City registered just 0.11% capital value growth.

The latest data suggest that it is time to call the bottom of the market and “buy the dip”. American investors have been supporting this narrative and taking advantage of buying opportunities at relatively low prices. Capital values remain -24.6 % lower than levels registered in August 2022 despite recent improvements. This quarter, Helical Plc and Orion Capital Managers exchanged contracts on a forward sale of 100 New Bridge Street, EC4 with a purchaser thought to be Boston based bank, State Street, for a price of £333 million reflecting a yield of 5.0%. The refurbished building contains 195,000 sf of offices on ten floors together with ground floor retail and a 7,450 sf roof terrace overlooking St. Pauls Cathedral. State Street will occupy part of the building themselves as they plot a move away from Canary Wharf when their lease at 20 Churchill Place expires in 2028.

However, at the same time, the post-pandemic shift towards hybrid working and pivot by occupiers towards highly specified Grade A space has left many secondary buildings underutilised or empty. Since 2022, some 3.3 million sf of office stock in Central London has been sold for a combined £2.5 billion for conversion to alternative uses including life sciences, student accommodation, and residential.

The conversions of secondary or redundant office buildings to hotel use have been driven by a scarcity of “budget” hotel rooms in the centre of the capital. Whitbread, the UK’s largest hotel business, has bought the freehold of Dorset House in Stamford Street, SE1 and will retrofit the vacant nine-storey, 90,000 sf building into a 400-bedroom Hub by Premier Inn hotel. The price paid was reportedly £47.5 million. The acquisition of Dorset House adds to the other 15 Hub hotels by Premier Inn already trading in London. Premier Inn opened its first Hub hotel in 2014. The hotels contain all the features of a Premier Inn room but in a smaller space. However, the hotels market is also entering a more challenging phase at the luxury end. This year the FT reported that London’s hotel operators are experiencing falling demand just as 757 new luxury hotel rooms open in 2025. Several new luxury hotels, including Chancery Rosewood, Six Senses, and Auberge Resorts Collection, will open in London in 2025, following openings and refurbishments in 2024 including Mandarin Oriental Mayfair and Park Hyatt London River Thames, The Savoy and London Hilton on Park Lane, creating a surge in supply.

Rest of UK offices Occupational view

• Vacancy rates in major regional office markets has doubled since 2020 but the supply of Grade A space has decreased.
• The Government’s continued commitment to the “Places for Growth” program, involving the closure of London offices and expansion of regional campuses could act as a much needed catalyst for growth.

Office availability In the South East increased by 2.4% in Q2 and 8.9% y-o-y, representing more than 4.5 years’ supply at the post-Covid average rate of takeup. Availability across all Rest of UK office markets outside London and the South East increased by 1.4 % in Q2 and by 4.3% year-on-year representing 4.25 years’ of supply. The supply of the best Grade A space is becoming more restricted. South East Grade A availability decreased by -7.9% in Q2 and there is 1.5 years of supply. Rest of UK Grade A office availability decreased by -7.9% in Q2 and there is 2.5 years of supply vs average take-up.

Despite a more constricted supply of Grade A space, headline vacancy rates across all the “Big 6” regional office markets have doubled since the Covid pandemic driven by secondary buildings. In the first quarter of 2020 Big 6 vacancy rates averaged 5%. By Q2 2025 the vacancy rate across the UK’s largest regional office markets had risen to 9.8%, ranging between 8% in Leeds and Edinburgh and 11% in Manchester. Vacancy rates are higher still across key South Eastern centres.

Despite higher vacancy rates, “Big 6” market rental value growth has slightly increased to 2.9% in the year to June from 2.6% in the year to March reflecting strengthening demand for Grade A space. In Bristol rental growth has increased from 4.25% to 6.0% y-on-y. Rental growth of 2.9% across all Rest of UK office markets matched the performance of the major regional centres but South East office renal growth was lower at 0.7% y-o-y in Q2.

Development completions of Grade A space in the South East and Rest of UK office markets have been relatively consistent both pre and post pandemic. In the last ten years, an average of 19 buildings providing 75,000 sf per scheme have been completed every quarter. However, in Q2 2025 Grade A development completions numbered 22 schemes providing 1.4 million sf, marking a significant step up in supply.

Demand remains strong, with many of the buildings currently under construction prelet. Space is only available in a handful of schemes including the Rylands Building in Manchester and Birmingham’s mixed use Beorma Tower. On completion, Birmingham’s latest tower will provide 11 floors of Grade A office space, 124 luxury apartments with private winter gardens or terraces, and ground floor retail and restaurants together with 28th floor gym.

HMRC’s 9,000 staff in the 463,000 sf Pilgrim’s Quarter office development in Newcastle’s Pilgrim Street regeneration area will be joined by colleagues from the Department of Work and Pensions in the adjacent 1 Pilgrim Place providing 173,000 sf on completion in 2027. Further projects of this nature can be expected as the current government is committed to continuing its predecessor’s Places for Growth programme by closing 11 buildings in Central London and opening or expanding regional campuses in the Big 6 regional centres as well as Aberdeen, Cardiff, Belfast, Sheffield, Darlington, Newcastle and York.

Investment market

• The UK’s major regional office markets experienced a significant decrease in investment volumes with Q1 2025, marking the weakest quarter for investment in the last decade.
• A move towards the repurposing of vacant office buildings into residential units, educational spaces, student accommodation and hotels is gaining pace.

The UK’s major regional office markets endured a weak first quarter of 2025 when investment volumes decreased by -74% to £142 million from £539 million in Q4, and down -71% compared to the five year quarterly average of £493 million. This was the weakest quarter in the last ten years. Preliminary estimates suggest that investment volumes in Q2 increased by 63% to £232 million but were still -53% below the five-year average. As usual the latest numbers for Q2 are likely to be revised in the coming months.

Manchester received 26.5% of total investment in the “Big 6” markets over the last 12 months, including Guernsey-based Melford Capital’s acquisition of 101 Embankment from M&G for £75 million. This deal has been hailed as one of the largest in Greater Manchester in recent years. M&G originally put the 171,000-square-foot office building up for sale in May 2023, seeking £80 million with a net initial yield of 8.45%. Manchester received 26.5% of total investment in the “Big 6” markets over the last 12 months, including Guernsey-based Melford Capital’s acquisition of 101 Embankment from M&G for £75 million. This deal has been hailed as one of the largest in Greater Manchester in recent years. M&G originally put the 171,000-square-foot office building up for sale in May 2023, seeking £80 million with a net initial yield of 8.45%. The reduced price of the current deal highlights continued pressure on capital values in this market.

The average total return performance across all “Big 6” centres fell to 0.5% in Q2 from 1.2% in Q1 as capital growth decreased to -1.1% from -0.4% in Q1. Total returns for the year to June increased to 2.4% from 0.9% in the year to March 2024. Nevertheless, capital values still decreased by -4.2% y-o-y.

The move towards re-purposing under-utilised or vacant secondary buildings is also apparent in regional office markets. This quarter, TT Group, one of the UK’s largest, privately owned property investment and development firms, acquired BT’s vacant former Stoke-on-Trent offices with 103,000 sf on seven floors, for a proposed conversion into 99 residential units, including 61 one-bedroom apartments, 24 studios, and 14 two-bedroom apartments and 110 secure bike storage units.

The UK’s universities are under financial stress as domestic tuition fees remain frozen and international student numbers are falling in response to restrictions on the right to remain in the UK after graduation. Nevertheless, record UCAS applications from domestic and US students has created a growing demand for centrally located, adaptable spaces from higher education.

In Birmingham, between 2022 and 2024, 220,997 sf of redundant office space has been re-purposed for educational use including Aston University’s acquisition of 10 Woodcock Street from Birmingham City Council. A further 62,477 sf was sold for student accommodation.

Artisan Real Estate, Scottish property developer, has acquired a five-story 1980s, Georgian style neoclassical townhouse in Edinburgh’s New Town. The developer has agreed terms with Whitbread to operate the hotel as a 102-bedroom Hub by Premier Inn hotel.