London office market recovery gathers pace due to space shortage

A year on from its nadir, London’s office market recovery is gathering steam as a lack of new development and a rebound in demand for space begins to chip away at a vacancy rate that peaked at its highest this century.

Prices were up 6% at the end of June from a year earlier, according to an index of transactions compiled by real estate data provider CoStar Group. The recovery began in the second half of last year as vacancy rates finally topped out at almost 11% after more than four years of virtually uninterrupted increases since the onset of the pandemic, CoStar’s data show.

“Office prices are continuing to appreciate amid improved investor sentiment toward the sector and strengthening occupier demand,” said Mark Stansfield, senior director of market analytics at CoStar.

A series of demand shocks, soaring construction costs and a highly uncertain outlook have deterred developers from committing to new projects in London meaning there’s a lack of top quality new space available in the city. That supply shortage is being compounded by a bounce back in demand as more staff return to the office, prompting some companies to seek bigger premises to avert desk shortages.

London office leasing jumped 40% in the second quarter, pushing the three-quarter trailing average to its highest since before the pandemic, CoStar’s data show. That’s started to eat away at the city’s historically high vacancy rate, with 1 million square foot more space being occupied than vacated in the city in the first half of the year. That compares to a 1.7 million square foot loss of occupied space in the same period a year earlier.

Improving demand for space has begun to feed through to investor demand for offices. Prices gained 2% in the second quarter of this year as rate cuts helped improve confidence, CoStar’s data show. Still, they remain 16% below the peak achieved in the third quarter of 2021 when the market enjoyed a boom fueled by record low borrowing costs.

Aware Super, an Australian pension fund, has invested about £500 million (R11.9 billion) in London offices in a little over six months, snapping up Lazard’s new Marylebone headquarters as well as properties in Mayfair and the City of London. Still, appetite for larger transactions remains muted with two of the biggest properties offered for sale in the past 12 months - the so-called Can of Ham building at 70 St Mary Axe and Brookfield’s CityPoint Tower - both being withdrawn from sale before a deal was concluded.

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