The United Kingdom’s commercial property market is beginning to stir from a prolonged slumber brought on by the COVID-19 pandemic, characterized by high inflation, remote work trends, and rising financing costs. While this awakening is being led primarily by office properties in prime locations like central London, a broader assessment reveals that the market is yet to fully recover. With major property sales poised to test investor appetite, a comprehensive analysis of market dynamics, pricing trends, and investor sentiment provides valuable insight into the path ahead.
Pandemic Aftermath: A Landscape Transformed
The commercial property market in the UK, particularly the office sector, took a significant hit during the pandemic. Office spaces saw a decline in demand as companies pivoted towards hybrid and remote working models.
The uncertainties triggered by rising inflation and borrowing costs further dampened investment prospects, creating an environment of hesitation and a steep drop in transaction volumes. Office vacancy rates in London soared, with many companies downsizing or deferring relocation plans.
Data from CoStar reveals that vacancy rates in the capital touched 10.1% in Q3 of 2024—the highest in more than two decades. Even more notably, the eastern Docklands area, including the prominent Canary Wharf, saw vacancy rates rise to nearly 17%. The need for alternative utilization of these spaces is increasingly evident, as developers explore converting empty office buildings into hotels or residential properties.
However, these gloomy metrics do not paint the full picture. With major new developments underway and a substantial shift in investor preference towards high-quality office spaces, there is optimism that the market is on the brink of turning a corner.
Key Properties Testing Market Waters
Several high-profile properties in London are currently on sale, presenting a litmus test for overall market conditions. Nuveen, a global real estate investor, recently put its 21-storey “Can of Ham” building on the market for GBP 322 million, which is a significant markdown from its 2022 valuation of GBP 400 million. The “Can of Ham,” so-called due to its distinctive rounded design—represents a crucial test of market sentiment, given the price revision.
Similarly, Brookfield Asset Management has listed its Citypoint tower for GBP 500 million, a far cry from its GBP 670 million valuation and below the price tag from its 2016 sale. These properties’ valuations underscore a central issue in the post-pandemic market: forced corrections in valuation, where sellers must accept significantly reduced offers. The reduced prices reflect investors’ concerns around tenant occupancy and the potential for future rental growth amid economic uncertainty.
New Developments Cater to Shifting Preferences
Despite the challenges in older office assets, demand for new high-quality office buildings is on the rise. M&G’s new office towers at 40 Leadenhall are reportedly over 80% let, despite their recent listing on the market. This success highlights an underlying trend of “upgrading”—tenants are seeking out premium office spaces to match their evolving workforce needs.
Buildings like 40 Leadenhall are designed with a broad range of modern amenities, including wellness facilities like saunas, yoga rooms, hair salons, fitness suites, and even cinema rooms. The presence of such perks is becoming essential as companies seek to entice employees back to the workplace. As Martin Towns, deputy global head of M&G Real Estate, noted: “We had a conviction that tenants would want to upgrade their space.”
A major trend in the construction of these new properties is the emphasis on green credentials and sustainable features. A report by Turner & Townsend alinea highlights that construction costs for prime office buildings in London have risen to over GBP 500 per square foot, compared to under GBP 400 per square foot before the pandemic. Half of this cost increase is attributed to the need for better amenities, while the rest is linked to improved sustainability standards—including energy efficiency and minimizing carbon footprints.
Office Market Recovery Lags but Shows Promise
According to MSCI, the overall UK commercial property market saw transaction volumes rebound by 26% year-on-year in Q2 of 2024. However, this uptick is nuanced: office deal volumes were still down by 21% over the same period, lagging behind segments like logistics and residential properties.
The market has not seen a single office sale above GBP 100 million in the first half of this year, the first time this has happened since 1999. These numbers clearly indicate that while investor appetite is returning, it remains uneven across different property types.
Nevertheless, overall market projections remain optimistic. Capital Economics forecasts that UK commercial prices will rise by 2% in 2024, a notable contrast to the continuing declines anticipated in the euro zone and the United States.
Moreover, United Kingdom commercial real estate is expected to outperform other Western markets over the next four years. These predictions are grounded in expectations of easing inflation, stabilizing interest rates, and improving financing conditions—all of which would help support demand for property investments.
Investors Eye the UK as Opportunities Arise
One of the driving forces behind the market’s anticipated recovery is renewed interest from both domestic and international investors. Following years of subdued investment, there is an emerging belief that the UK presents attractive opportunities at a relative discount, especially compared to other European capitals such as Paris or Frankfurt.
James Seppala, head of real estate for Europe at Blackstone, mentioned that the market’s “mood music” had changed, with more investors returning after years on the sidelines. Fiona Voon, head of real estate capital markets UK at BNP Paribas, similarly noted that investors are being drawn to the UK due to the stability of its political environment, which is seen as an advantage compared to other regions. This interest is particularly evident from Middle Eastern, Asian, and Australian investors who are keen to make their mark while valuations are favorable.
Domestic investors like Schroders are also stepping up, with plans to deploy hundreds of millions of pounds into the UK commercial property market this year and the next. The firm’s global head of real estate, Nick Montgomery, emphasized that “from the position we’re in, it’s more of an opportunity than a risk,” highlighting the shifting investor perception of the UK’s office market.
Future Directions and Challenges
While the signs of revival are promising, the road ahead for the UK commercial property market remains challenging. The transformation of office usage is still underway, as remote and hybrid work arrangements appear to have lasting impacts. Many outdated and underutilized properties will likely need to be converted for alternative uses, such as residential housing, in order to avoid lingering vacancies.
Additionally, while new premium properties like 40 Leadenhall attract tenants, many older buildings outside core locations face bleak prospects. According to MSCI data, London’s overall office vacancy rate remains above 10%, reflecting a bifurcation between the demand for high-quality and lower-quality office spaces.
Financing constraints also present a significant hurdle. The cost of borrowing remains a challenge for many potential buyers, and higher refinancing costs may force some landlords to sell properties at discounted prices. However, the recent easing of inflation and expected stabilization of interest rates may make financing slightly more attractive over the next year, which could provide a boost to deal volumes.
An Opportunity-Laden Recovery
The UK’s commercial property market is on the cusp of a potential recovery, but this journey will likely be complex and varied across property types and locations. Prime office buildings in central London, which offer upgraded amenities and sustainability features, are expected to lead the charge in this recovery. Meanwhile, older office properties that do not meet the evolving demands of tenants’ risk being left behind unless they are repurposed.
The market’s recovery is contingent on a combination of factors, including the stabilization of financing conditions, effective management of surplus office space, and investor confidence in the broader economic environment. For now, international and domestic investors are increasingly optimistic, seeing value in the opportunities presented by a market that has experienced forced price corrections.
Their activity will be pivotal in shaping the trajectory of the UK commercial property market over the next few years, potentially marking the beginning of a broader revival for commercial real estate in the post-pandemic world.