London Offices: Cutting Through the Confusion

Posted by Colliers on 4th December 2023 -

Contradictions include the fact that overall London vacancy is c.10 per cent, but on the other hand we have seen some record-breaking rents achieved. 

What is happening on the ground?

Our data agrees with the fact that overall London office vacancy stands at 10 per cent, which despite falling from a peak of 11.4 per cent in late 2022, is still significantly above the 10-year average of 6.4 per cent. It’s worth breaking this data down however and looking at each submarket to get a real idea of what is happening. For example, the current vacancy of new grade A offices in the City core is just 1.6 per cent. 

This follows the trend in demand for high quality office space which has spiked post-pandemic. Occupiers now have a sharper focus on location, proximity to transport hubs, access to amenity and their commitment to net zero carbon. On the other hand, the supply of these best-in-class buildings remains at near historic lows, particularly in core submarkets. What this has meant is that there are pockets of rental growth at the prime end of the market in London, but downward pressure on rental levels for secondary space. 

Another significant factor affecting the occupier market is the UK Government’s proposed enforcement of the EPC B target for privately rented non-domestic buildings by 2030. This has meant that the market has been split into ‘green buildings’ which meet the EPC standard, and ‘brown buildings’ which are below the EPC target. 

We are seeing green buildings show resilience in recruiting good quality tenants, and achieving premium rents as a result. In contrast, brown buildings are struggling to secure tenants even where landlords are offering incentives and reducing their own expectations. This is motivating many property owners to create their own strategies to improve their building’s green credentials. 

One of the biggest hurdles to these green renovations is the need for available capex to carry out the project. In response, many owners are funding the changes through raising the service charge or adjusting the rents at a property. 

What does the future hold for London offices?

Whilst there is still a lack of supply for green buildings, the valuation gap between efficient and inefficient buildings will widen. We expect that this will motivate landlords to put more capital into those underperforming assets in order to maintain or improve its value. The landlords with less liquidity, experience or the desire to put effort into making the required changes will eventually be forced to sell their properties. This will result in more value-add opportunities emerging in the market.

As the refurbishments take place there will be a positive knock on effect for the user experience of London’s offices. Central facilities such as building management systems will become more efficient and responsive, amenity spaces will be prioritised, as will outdoor areas and communal spaces. 

As we mentioned before, the supply levels of office buildings still exceeds demand which is reflected in the vacancy rates. Therefore we can assume that more buildings in the non-core commercial areas will be changed into different uses. In town, we can see these uses being changed to residential, PBSA or hotels to help cope with local demand for these types of properties. 

This change of use may well result in the formation of new and interesting clusters in non-core commercial submarkets. We are already seeing this happen with the growth of the knowledge quarter in King’s Cross and the life sciences hub being created at Canary Wharf. 

At first glance, the headlines about the London office market can come across as confusing and sending mixed messages. However when you dig below the surface what we see is a market that is undergoing significant change and adapting to the need for sustainable buildings, following a turbulent period during the pandemic. This isn’t the end for London’s evolution and those investors who can keep abreast of the latest trends and occupier demands will be the best placed to succeed in the coming years.

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