Nearly five years on from Prime Minister Boris Johnson telling the nation to stay at home to stop the spread of the coronavirus, there is still no consensus about how profoundly the pandemic affected the London office market and how healthy that market is today.
Cranes on the skyline testify to new space being developed and completed to soak up demand for modern, sustainable offices, and major corporates clearly feel more empowered to mandate that their staff return to the office part time — or even full time.
Yet workers still have yet to return to the office in the numbers they went in prepandemic, and the increasing availability of newer developments could leave older and secondary assets in danger of being left stranded.
London’s office market is at a pivotal point.
Take these two analyses, both of which have evidence to support them.
“With new development activity accelerating the rate of obsolescence and pushing up vacancy rates with older, lower-quality assets potentially becoming stranded, vacancy rates could move up to around 12.5% by 2026 and 14.5% by 2030 unless significant stock removals take place,” Oxford Economics Director of Global Real Estate Economics Mark Unsworth warned.
The counterpoint?
“The narrative shouldn’t be about panicking over an excess of Grade B space,” BNP Paribas Real Estate Senior Director Simon Knights said. “Instead, the focus should be on the fact that as net office supply continues to decrease year-on-year, office rents are likely to rise and yields will become more attractive.”
Five years on, 2025 feels like a pivotal 12 months for London’s office sector, and opinions are divided, particularly on the fate of the city’s Grade B stock.
In its most recent figures for the 2023-2024 financial year, Transport for London recorded 3.6 billion passenger journeys, up 9% from the previous year, meaning journeys had increased from 80% of prepandemic levels to around 88%.
The London journeys data is broadly aligned with central London vacancy rates. The West End has the lowest vacancy in central London, at 7.42%, just above the five-year average of 7.03%. Grade A vacancy sits at just 1.6%, with Mayfair at a record-low 0.5%.
In the City for Q4, available supply dropped 3% quarter-on-quarter to 11.4M SF, pushing vacancy down to 10.3%, below the five- and 10-year averages. City core vacancy stands at 9.3%, with Clerkenwell/Farringdon even lower at 8.8%, according to figures from BNP Paribas Real Estate.
Grade A leases accounted for a 75% share of all transactions during Q4, with circa 671K SF of this space being prelet, evidence of the much-vaunted flight to quality. But the City and West End have little to no Grade A space available.
But there is that distinct difference in opinion about how redundant space will be absorbed and the likely impact on London’s key West End and City markets.
In its latest findings, Oxford Economics warned that significant office stock repurposing is required in central London to prevent vacancy rates moving higher. While it forecasts an additional 240,000 inner London office jobs by the end of the decade, vacancy rates are set to move higher because of the pace of office development activity driven by the demand for modern, high-quality buildings, it argued.
That is borne out by BNP Paribas figures that show available office supply reached 28.2M SF at the end of 2024, an increase of 3.5% compared to the close of 2023.
And for the central London office vacancy rate to remain stable, office repurposing to other uses would need to total 14.1M SF by the end of the 2020s.
But BNP Paribas argued that this issue has been overstated. It contends that much of the older stock in the West End is financially viable for refurbishment to modern standards.
“Many of the so-called problematic Grade B buildings were constructed after the 1980s. Unlike their 1960s or ’70s predecessors, these more modern buildings were built with good bones, making them prime candidates for refurbishment,” BNP Paribas Real Estate Senior Director of City Leasing James Strevens said, stressing that landlords could also sell older stock as value-add opportunities.
BNP’s Knights went further and described the narrative around the Grade A and B office space differential as fundamentally flawed and “like looking at the issue through the telescope the wrong way round.”
He said that despite ongoing office development and refurbishment in West End postcodes, there has been a net loss of office space year-on-year, flagged by Westminster as a growing concern, driven by the repurposing of office space for other uses, including medical facilities, hotels, retail and residential developments.
Occupiers are focused on new development, asking questions about the city’s Grade B stock.
Agent Knight Frank also points to several occupier behaviour changes pre- and postpandemic. Before Covid-19, tenants typically sought larger office spaces with a focus on open-plan layouts and high-density seating, with average space per employee around 80 SF to 100 SF.
But the adviser said there is no longer a one-size-fits-all space requirement, with occupiers in the legal and niche financial sectors leasing more space than they previously occupied. By contrast, some small to midsized firms have downsized, reducing their space requirements by 20% to 40%.
There is also high demand for more flexible leases, allowing tenants to secure additional space only if needed while avoiding immediate financial commitments. Some have chosen to locate in new submarkets because of a lack of available prime spaces in areas such as Farringdon, Paddington, Soho and Victoria to reduce occupancy costs.
Knight Frank estimates prime City rents at around £72.50 per SF at lockdown and prime West End rents at £115 per SF. After a period of inertia running until autumn 2023, those rents had climbed steeply to £95 per SF and £160 per SF, respectively, by the end of 2024.
With many large occupiers mandating that their staffs return to the office, there has also been a shift toward spacious layouts with more collaboration zones, quiet areas, wellness spaces, private booths, soundproof pods and Zoom-friendly meeting rooms. But higher fit-out costs have prompted some occupiers to evaluate more value-based offices or remain in their existing space.
There has long been a debate about what constitutes full office occupancy. Even before the pandemic, factors such as holidays, external meetings, staff sickness and other operational variables meant that offices were rarely at 100% capacity. Research from the British Council for Offices indicated a typical occupancy level of around 60%, while other industry estimates have suggested peak utilisation figures closer to 70% to 80%.
“For fair comparison, it is difficult to say. Prepandemic Fridays were always quiet, and the figures would always be low during school holidays,” Remit Consulting’s Lorna Landells said. “In the summer months, 60% occupancy is probably about right as an average. A figure of 80% occupancy rates in the busiest weeks of the year is hard to argue with too.”
As a result, Remit Consulting says that initial average UK occupancy rates in May 2021, as the country finally exited stop-start lockdowns, were as low as 8.2% on an absolute basis and at best 13.7% based on an adjusted 60% comparison basis. That compares with a little over 37% on an absolute basis now, or an adjusted 62%.
“In the short term, we anticipate office occupancy will continue its steady upward trajectory,” Landells said. “However, the remote working cat is out of the bag, and while some companies may encourage higher office attendance, a universal return to prepandemic working patterns seems unlikely. If current trends persist, office occupancy could theoretically reach prepandemic levels by early 2028, but whether this constitutes full occupancy in a hybrid working world remains an open question.”
