Office market update Winter 2024

In short: Investment activity starts to rise from a low base, as prime office market gains more momentum. However, demand for secondary and tertiary office space is still low, pushing up vacancy rates across the sector. 

• The UK office vacancy rate keeps rising, but it is a tale of two markets: prime and everything else. The average UK office vacancy rate has risen to 8.6%, up from around 5% in 2019. A mix of high levels of supply and falling demand, especially for space which is not best-in-class, is resulting in more vacancies. There is around 120 million square feet of vacant office space across the UK, and this is set to continue rising next year.   
• Average vacancy rates are well above 5-year averages in all wider city markets, as can be seen from chart below.  
• However, when it comes to prime office space in city centres, the story is strikingly different, with strong demand for this type of office in central London, Manchester, Bristol, Edinburgh, Oxford and Cambridge. One report signals that office take-up across the ‘big six’ cities excluding London hit a six-year high in Q3.  

• In London, vacancy rates are falling in the West End market, with high levels of demand and limited supply. In contrast, vacancies will continue to rise in Docklands as tenants are increasingly moving to the City. The trend is also underlined when looking at net absorption rates, with absorption positive for the best-in-class office buildings, while turning negative for sub-prime buildings. Office availability in the super-prime London fell to the lowest rate since 2021 in the summer of this year. The increasing supply of smaller Cat A+ space within new or existing buildings, for which there is good demand, is also beginning to put some upward pressure on headline rents, as these can command higher rates.  
• The attraction of prime office space is underlined by deals that have been agreed with high rents in recent months. In May, S&P Global took the upper floors of the new-developed St Michael mixed-use development in Manchester, at £44psf, a record rent for the city. Likewise, several deals have been struck at rents of more than £130psf in London’s West End, while a record £122psf was recently paid for space at 22 Bishopsgate in the City of London. Rents are especially competitive for space in upper floors with terraces in best-in-class new-build developments.  
• Average UK office rents are up 2% in the year to October, according to data from MSCI, but this masks the difference in performance for best-in-class space vs the rest. Also, the data only reflects the stock which is being successfully let – and there is a significant quantum of office stock which is not letting, as outlined by the large vacancy rates. Also, higher rents are also being commanded by Cat A+ stock, which is not separated out from the wider office sector market in the data.  

• There have also been some very large deals struck in terms of space in the most sought-after markets, with BDO agreeing a 220,000 sqft pre-let at the M Building on Oxford Street in London. Yet, in a move which highlights the importance building quality as well as location, Evercore, the investment bank, has agreed to let 135,000 sqft at 105 Victoria Street, in a move away from Mayfair. The building in Victoria will be the UK’s largest 100% electric, net zero carbon office development. In Manchester, Bank of New York Mellon Corporation has taken the whole 200,000 sqft at 4 Angel Square, a net-zero and BREAAM Outstanding building.  

• In the longer-term, the vacancy rate will start to decline as supply pipelines slow, and also as secondary and tertiary office space is redeveloped into other uses where development economics allow. As office values continue to fall in the sub-prime markets this is becoming increasingly viable despite higher build costs. The recent Deloitte’s Crane survey showed a drop in new London office construction starts between April and September 2024. The Crane survey showed that Life Science schemes, which contain both laboratory and office space, were responsible for 35% of new construction starts in London in the six months to September this year. Excluding life sciences there was a 42% drop in office construction starts compared to the previous six months.  

• The demand for life sciences is illustrated by the redevelopment of neo-classical Victoria House in Bloomsbury, the former headquarters of Liverpool Friendly insurance company, which is reopening as a life science research facility.  

• In terms of redevelopment, offices are increasingly being targeted by hotel operators in city centres, including London, Newcastle and Manchester. Also, student housing and mutli-family as well as private housing providers are running the slide-rule over office building conversions. 

• Owners’ decisions on their buildings may be accelerated by the need to meet MEES requirements in the coming years. At present it is still understood that commercial buildings need to be rated EPC C by 2028 and EPC B by 2030. This may require additional investment, and, especially for those where development finance costs are rising, this could lead to a decision to sell.  
• UK Office investment levels were at the highest level this year in Q3.  But overall investment levels remain muted, with the annual total for investment in the year to the end of October at £7.9 billion, down from a 10-year average of £22.2 billion.  
• There were significantly more large investment deals in London in Q3, including several above £100m, after no such deals in the first half of the year, signalling that the forecast pick-up in investment activity may be starting to build.  
• Interest in the office market is being driven by investors looking for redevelopment or value- add opportunities, with domestic and international buyers also showing more interest in markets where pricing has fully re-based.  

Key investment deals:

Key statistics:

Source: Cluttons, CoStar, MSCI. Key regional cities: Birmingham, Bristol, Manchester, Leeds. Central London: City, Canary Wharf, West End and Southbank. Data can be lagging **rest of UK.  

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