Office market update Autumn 2024

Quality counts.

In short: The structural change in the office market is only becoming more entrenched. There’s a continued flight to quality and strong appetite for sustainable best-in-class office space while tenant demand for secondary or tertiary space is in the doldrums. The investment market remained relatively quiet, but the base rate cut in August will engender more activity in the second half of the year, especially for buildings with change of use potential

UK office vacancy rate continues to climb. The overall office vacancy across the UK was 6.6% in Q2 2024, a continued rise from a rate of 4% before the pandemic, while in key regional cities, the vacancy rate is at 9.9%. Across Greater London, the vacancy rate is also at 9.9%, the highest level in 20 years. This is due to weak demand amid hybrid working, which has contributed towards the flight to quality as some businesses reduce their office footprint. Around 105 million square feet of office space across the UK is currently vacant – the highest level in a decade.

In London, vacancy rates have been pushed higher by large supply pipelines. But the disparity between office quality is laid bare in the central London market, where secondary and tertiary stock has the highest vacancy rates, as explained more fully below. This has pushed up rents at the top end, creating two separate narratives for the office market depending on quality – there will need to be a new baseline for offices in the future to make this easier for investors to unpick. In Manchester overall vacancy rates are lower, as a lack of supply in the market supports demand.

CoStar reports that asking rents for all types of offices are up 0.8% on the year in London, but below this headline, there are disparities. Agents report that super-prime offices in the city centre are registering modest rental growth, but mid-tier and lower-tier office rents are flat or falling on the year. Increasingly other incentives, such as rent-free periods, are being offered to protect headline rents.
Rents are up 1.1% on the year across the UK, although secondary and tertiary stock in many parts of the UK will be showing lower rental growth than this average.

London office: All eyes on the centre. There is around 18.8 million square feet of office space currently under construction across Greater London, the highest level in more than 10 years. As this stock comes online, it will keep the vacancy rate higher, and explains negative net absorption in H1.

The standard of office space is also closely aligned with vacancy rates. A recent paper from Capital Economics highlighted that the highest-yielding office stock in central London had the highest vacancy rate of around 27%, forecast to rise to over 30% by the end of next year – increasing the risk of long-term obsolescence. The lowest-yielding office space has a vacancy rate of just 1% in the capital.

It’s not just about building quality however, geography also comes into play. The central London market incorporates some of the key markets which have a higher proportion of best-in-class new-build, which is in high demand, including the City, Mid-Town and the West End., the latter being chronically undersupplied which has pushed up rents this year. In contrast, markets further to the east (Docklands) and west (Hammersmith) have registered a sharp decline in demand.

The focus on the city centre means that micro-markets are emerging. For example, the fringe of the Southbank market is underperforming, as asking rents have been slow to recalibrate to weaker market conditions. In contrast, west City core around St Pauls is more buoyant.

The increasing supply of smaller Cat A+ space within new or existing buildings, for which there is good demand, may also be putting some upward pressure on headline rents, as these can command higher rates.

Investment levels remained muted in H1 2024. There was a slight recovery from near 20-year low investment levels in 2023, but smaller deals are being transacted this year, with a noticeable lack of larger lot sizes. The August rate cut, followed by another, or even two, later this year, will likely lead to a pick-up in activity in H2, and the market for ‘value-add’ investors is also set to pick up.

Headline office capital values have fallen by an average of 33% over the last four years – and 14% over the last 12 months alone. However, the scale of capital value declines has now eased, with only a modest 1% fall in values between April and June this year. There is increasing interest among investors especially in regional cities, and the continued re-basing of office values will make this asset class more attractive to investors especially as the cost of finance continued to recede. Aside from best-in-class assets, activity will also likely pick up for assets which offer the opportunity for value-add or change of use.

Investment activity in Manchester was muted again in H1, but there have been some recent notable deals for secondary office space in the centre of the city which transacted above asking price, underlining demand in this undersupplied market. Trinity House, purchased by Midso Group in February, has potential residential or hotel opportunities once the current lease runs out in four years.

Key investment deals:

Key statistics:

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