‘A landlord’s office market’: the outlook for 2025

Investors, developers and agents are optimistic of an upturn in the office market next year, as many predict value-add investments will present the greatest opportunity for investment amid the ongoing supply shortfall. Although investment has been slow in 2024, John Knowles, head of national capital markets at Colliers, predicts that sentiment will improve in 2025, with capital markets activity forecast to strengthen as interest rates and gilt yields stabilise. But “the days of relying solely on standing investments are over,” adds Knowles. “In 2025, the focus will be on uncovering value through refurbishment, sustainable upgrades and alternative assets with strong income potential.” Chris Cheap, head of transactions at Avison Young, and his colleague Paul Broad, regional managing director for Glasgow, say next year presents significant opportunities for funds and cash-rich investors, due to a delay in the development pipeline for high-quality offices. Cheap says: “Where people have got capital, where they’re not having to go and source it, there’s opportunities to get in and out fairly quickly. “You’ve got a lag in the development pipeline of maybe three to four years… that means if you’re buying a value-add office, as long as it’s in a good location, and you can service or reposition it and bring it back to market within 12 months, you’ll do well because occupiers don’t have much choice.” For the same reasons, Savills recently raised its average total return for offices in central London and the regions to more than 10% respectively, naming offices in core locations among their top investment picks. Felease navidad The leasing market has been active this year, with the first three quarters running 8% ahead of the five-year average according to JLL. Martin Towns, deputy global head of real estate at M&G, believes momentum will continue into next year: “With limited new stock available and very little coming through, I expect 2025 to increasingly become a landlord’s office market, particularly at the top end when it comes to amenity rich buildings. Occupiers will have to start thinking further ahead – considering new developments which may complete in three to five years’ time – to be in with a chance of securing premium space.” Towns adds: “This shortage of stock and pressure on rents means that occupier demand is likely to continue gradually spreading out to less prime locations and buildings, supporting a broader recovery in the market over the next year. It remains to be seen how far that trend will go, but there should be attractive opportunities for value-add investors with the expertise to bring well-located secondary assets up to Grade A standard.” Matthew Bonning-Snook, chief executive at Helical, also expresses optimism about the benefits this could bring to the central London office market, predicting that “take-up is likely to be back to its 10-year average while active demand sits 35% above this”. He says occupiers are looking to take better quality and more, rather than less, space along with high-quality amenities to accommodate new working patterns. “There is a clear undersupply of this best-in-class space as the market has waited to understand the impact of the pandemic on occupier demand, the impact of increased build and funding costs and the outward movement of yields due to the changing interest rate environment,” says Bonning-Snook: “The end result of all of this is that there is intense and growing competition for the best assets, which is going to continue to drive up rent levels across our core markets.” Guy Thomas, head of place assets at Lendlease, says this could, however, also benefit London’s more peripheral office hotspots, such as the company’s campus in Stratford. “We’re seeing some of the punchiest rental growth analysis coming out of the consultancies that has been seen for some time. But the interesting thing about that is when you then scratch underneath the surface,” says Thomas. “There’s quite a compelling story around the reality of that supply and demand dynamic and what stock will become available and possibly a price point question which is now – ‘Am I paying those £100-plus rent in the city or West End, which are then forecast to go up exponentially?’ “If the forecasts are to be believed, you then have quite a substantial jump. That dynamic could mean markets like the core West End are breaking down a little bit and we’re certainly seeing a huge uptick in people looking [at Lendlease’s Stratford-based offices] from those markets.” More than a workplace Across all offices, however, Louise Ioannou, head of workspace at developer HB Reavis, believes the lessons learnt over the past year will continue to shape how developers and occupiers view the workplace: “The office gets a bad rep… it is not just the office itself – what is the space that we’re providing?” In collaboration with research studio Future Places, HB Reavis has been researching the perceived current ‘loneliness epidemic’ and the role workplaces can play in addressing it. Ioannou said HB Reavis was already experimenting with some ideas to organise events and create communities around amenity spaces, such as in the company’s HubHub at 20 Farringdon Street, EC4. “I think that’s something that we can see that will continue to grow a space for bringing people together – because ultimately that’s what you want your buildings to do, rather than just dragging people in to a desk.” Image © Ismail Merad/Unsplash